the physicians could realize a net profit of $100,000. If the market is not favo

Question

the physicians could realize a net profit of $100,000. If the market is not favorable, they could lose $40,000. Of course, they don't have to proceed at all, in which case there is no cost. In the absence of any market data, the best the physicians can guess is that there is a 50-50 chance the clinic will be successful. Market fee of $5,000 is assessed to perform the study.

P [favorable market I favorable study]= 0.82

P [favorable market I unfavorable study] = 0.11

P[unfavoarble research study] = 0.45

Question: what is the expected value of the sample information? EVSI=

Question: How much might the physicans be willing to pay for a market study?

Explanation / Answer

P(Favorable Market)=0.82*0.55+0.11*0.45=0.5005

P(Unfavourable Market)=0.18*0.55+0.89*0.45=0.4995

Expected Value=(100000-5000)*0.5005-(40000+5000)*0.4995=35070

Physicians would be ready to pay as long as their expected value is positive

Hence (100000-x)*0.5005-(40000+x)*0.4995>0 Hence x<30070

Hence physicians would be pay anything less than 30070

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