Assignment:
Decision Analysis
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.
From statistics, recall the idea of the expected value of some outcome, x, Here, x is our payoff. The formula of the expected value of x, E(X) is:
Decision S.O.W Payoff
carry umbrella rain -$1
no rain -$1
Do not carry rain -$50
umbrella
no rain $0