Compare the primary strengths and weaknesses of cost-benefit analysis (CBA), cost-effectiveness analysis (CEA), and cost-utility analysis (CUA). Give your opinion on which method you believe to be the most effective in economic evaluation.
Compare the primary strengths and weaknesses of cost-benefit analysis (CBA), cost-effectiveness analysis (CEA), and cost-utility analysis (CUA). Give your opinion on which method you believe to be the most effective in economic evaluation.
Using the umbrella decision-making example on page 198 of the textbook, suppose the probability of rain is 0.6, the ruined clothes cost is $30, and the lost umbrella costs are $2. Come to a decision based upon these assumptions, and determine the break-even probability of rain.
Table 10-5 Revenues, Expenses, and Expected Payoffs for Clinic Renovation
Alternative
State of the world (future demand forecasts)
Earnings
Renovation expense
Payoff
No Renovation/Do Nothing
20
$450,000
0
$450,000
No Renovation/Do Nothing
20
$450,000
0
$450,000
No Renovation/Do Nothing
20
$450,000
0
$450,000
Minor Renovation
20
$450,000
$225,000
$225,000
Minor Renovation
35
$787,500
$225,000
$562,500
Minor Renovation
35
$787,500
$225,000
$562,500
Major Renovation
20
$450,000
$700,000
($250,000)
Major Renovation
35
$787,500
$700,000
$87,500
Major Renovation
50
$1,125,000
$700,000
$425,000
10-2
In the clinic renovation example, what if management thinks that the likelihood of current demand remaining is 30%, the likelihood of a moderate increase is 25%, and the likelihood of a large increase is 45%? What should they do, according to the expected total payoff?
