Strengths and weaknesses of cost-benefit analysis


Discuss the below:

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  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

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?

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