• 05 JUL 19
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    Compare the primary strengths and weaknesses of cost-benefit 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.

    Table 10-5 Revenues, Expenses, and Expected Payoffs for Clinic Renovation

    AlternativeState of the world (future demand forecasts)EarningsRenovation expensePayoff
    No Renovation/Do Nothing20 $450,0000$450,000
    No Renovation/Do Nothing20 $450,0000$450,000
    No Renovation/Do Nothing20 $450,0000$450,000
    Minor Renovation20 $450,000$225,000$225,000
    Minor Renovation35 $787,500$225,000$562,500
    Minor Renovation35 $787,500$225,000$562,500
    Major Renovation20 $450,000$700,000($250,000)
    Major Renovation35 $787,500$700,000 $87,500
    Major Renovation50$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?

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