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?