Question
The government is deciding whether to buy a vaccine that is in the development stage today (period 1) or wait until period 2. During period
The government is deciding whether to buy a vaccine that is in the development stage today (period 1) or wait until period 2.
During period 1, there are two chance events that occur regardless of the governments decision. First chance event: It will be discovered whether the vaccine works (60% chance) or fails. And Second chance event: It will be discovered if impacts of the disease are Mild (80%) or Severe (20%). These two chance events are independent.
If the government chooses to buy it in period 1, the vaccine cost is 275.
If the vaccine works, then there is no additional cost (and no later decision)
If the vaccine fails and the disease is Mild, then the disease cost is 300 (and no later decision)
If the vaccine fails and the disease is Severe, then the disease cost is 900 (and no later decision)
If the government chooses to not to buy the vaccine in period 1 then there are still the two chance events in period 1 (mentioned above) plus the later decision in period 2 (provided the vaccine works).
The chance event and cost associated with this period 2 decision depend on whether the impact of the disease in period 1 was Mild or Severe.
If the vaccine works, and the disease has been Mild in period 1:
-If the government decides to buy the vaccine in period 2, then there is a chance event:
70% chance that the vaccine will be fully available (but delayed) so that the disease cost is 80 + the vaccine cost of 200
30% chance that the vaccine will be only partly available (but delayed) so that the disease cost is 225 + the vaccine cost of 125
-If the government decides not to buy the vaccine in period 2 when the disease has been Mild, then the cost is 300
If the vaccine works, and the disease has been Severe in period 1:
-If the government decides to buy the vaccine in period 2, then there is a chance event:
30% chance that the vaccine will be fully available (but delayed) so that the disease cost is 225 + the vaccine cost of 450
60% chance that the vaccine will be only partly available (but delayed) so that the disease cost is 675+ 250
10% chance that the vaccine will not available so that the disease cost is 900
-If the government decides not to buy the vaccine in period 2 when the disease has been Severe, then the cost is 900.
If the vaccine fails in period 1 and the government chose to not to buy it in period 1, then if the there is no decision for period 2 and the costs are:
If the disease is Mild, then the cost is 300
If the disease is Severe then, the cost is 900
Using a decision tree and the expected cost criterion, determine the governments least cost course of action.
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