02 Jul Quantitative Meth For Hlth Srv
- 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.
page 198 below
One way of looking at the chronology and payoffs of a decision is to construct a decision tree. A decision tree looks like a tree with branches for each decision alternative and each state of the world. A square is used for a choice node and a circle is used for the states of the world nodes. The decision tree for the previous example is shown in Figure 10-1. Note that this tree shows the decision being made first and the weather condition occurring second. When you choose to carry the umbrella, you are choosing under conditions of uncertainty; you do not know for certain whether it will rain or not. If it is raining when you leave the house, you are choosing under conditions of certainty; you know the payoff for sure so you choose correctly every time. On a day when it is not raining as you leave the house, you do not know the state of the world later that day for certain so you cannot be certain of choosing correctly. In this instance, you would no doubt consult a weather forecast for assistance. In our example, let us suppose that there is an 80% chance of rain. You will notice that in our decision tree diagram, this probability is added after each state of the world in Figure 10-2. From this information we can calculate our total expected payoffs for each decision.
Expected Payoff as the Decision Making Criterion
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:
Figure 10-1 Decision Tree for Carrying an Umbrella
This just 2 discussion question the added text is from page 198 out of text book for the second dq
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