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Choosing the best alternative

Pharmgen Corporation is a pharmaceutical company developing a new drug to fight cancer. It recently discovered a rival company is just one year away from finishing its development in a similar drug which will take away some market share if released. Pharmgen identifies two possible scenarios. The first one, which has a probability of 0.30, is if its development finishes ahead of its rival. In this case Pharmgen estimates that its profit will be $100 million. The second one, which has a probability of 0.70, is if its development finishes after its rival does. In this case, Pharmgen estimates that its profit will be $30 million only.

Management in Pharmgen Corporation has come up with three possible decisions. The first one, the base case, is to leave things the way it is. The second one is to embark on an aggressive advertising campaign which would change the profit number in the two scenarios to $120 million and $15 million respectively (after all the costs are subtracted). The third decision is to sell its current development to the rival company. In this case the overall profit is $40 million in both scenarios.
What would be the best option based on the following criterion?

1. Maximax
2. Maximin
3. Minimax regret
4. Expected value

Solution Preview

Please refer attached file for better clarity of tables.

Solution:

Let us make a payoff table first as under
Figures in million $
Investment Alternatives Possible Scenario
First Second
Develop new drug 100 30
Aggressive Advertising 120 15
Sell to rival company 40 40

What would be the best option based on the following criterion?

1. Maximax
Figures in million $
Investment Alternatives Possible Scenario
First Second Maximum Payoff
Develop new drug ...

Solution Summary

Solution describes the steps needed to choose one best alternative based upon maximax, maximin, minimax regret, expected value criterion.

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