Question 1. (55 points) A major pharmaceutical company is considering two formulas to cure a worldwide disease (Formula A and Formula B). Formula A has high uncertainties about the production cost due to insufficient knowledge of the experimental results and it might be risky in terms of side effects. If the experimental results are not safe enough then the company has to face the extra cost due to strict regulations. Formula A: Cost of Research& Development for Formula A is $10.000.000 Safety Level Strong Moderate Weak Production Cost(S) 1.000.000 4.000.000 8.000.000 Furthermore there might exist a "catalyzer" for Formula A and the company estimates that P(the catalyzer exists) -0.5. The probability of strongly safe level increases if the "catalyzer" exists for Formula A with the following conditional probabilities P(Strong the catalyzer exists) -0.65 P(Moderate the catalyzer exists) = 0.30 P(Weak the catalyzer exists) =0.05 P(Strong the catalyzer doesn't exist) -0.1 P(Moderate the catalyzer doesn't exist) = 0.35 P(Weak the catalyzer doesn't exist)=0.55 On the other hand, Formula B is fairly certain to have a moderately safety level. The characteristics for Formula B are as follows: Formula B: Cost of Research & Development for Formula B is $8.000.000 Safety Level Production Cost(s) Probability Weak Moderate 4.500.000 9.000.000 0.2 0.8 a) Draw a decision tree and determine the best decision strategy in terms of EMV's b) For which values of p = P(the catalyzer exists) does your best decision alternative changes? c) Apply two way sensitivity analysis on safety level probabilities in which the catalyzer exists. Question 1. (55 points) A major pharmaceutical company is considering two formulas to cure a worldwide disease (Formula A and Formula B). Formula A has high uncertainties about the production cost due to insufficient knowledge of the experimental results and it might be risky in terms of side effects. If the experimental results are not safe enough then the company has to face the extra cost due to strict regulations. Formula A: Cost of Research& Development for Formula A is $10.000.000 Safety Level Strong Moderate Weak Production Cost(S) 1.000.000 4.000.000 8.000.000 Furthermore there might exist a "catalyzer" for Formula A and the company estimates that P(the catalyzer exists) -0.5. The probability of strongly safe level increases if the "catalyzer" exists for Formula A with the following conditional probabilities P(Strong the catalyzer exists) -0.65 P(Moderate the catalyzer exists) = 0.30 P(Weak the catalyzer exists) =0.05 P(Strong the catalyzer doesn't exist) -0.1 P(Moderate the catalyzer doesn't exist) = 0.35 P(Weak the catalyzer doesn't exist)=0.55 On the other hand, Formula B is fairly certain to have a moderately safety level. The characteristics for Formula B are as follows: Formula B: Cost of Research & Development for Formula B is $8.000.000 Safety Level Production Cost(s) Probability Weak Moderate 4.500.000 9.000.000 0.2 0.8 a) Draw a decision tree and determine the best decision strategy in terms of EMV's b) For which values of p = P(the catalyzer exists) does your best decision alternative changes? c) Apply two way sensitivity analysis on safety level probabilities in which the catalyzer exists
