Question

The probability that a pharmaceutical firm will successfully develop a new drug that will return $750 million dollars is 0.14. Of the research is unsuccessful, the company incurs a cost of $100 million dollars. What is the expected return in the long run for continually trying to develop new drugs?

Answer 1

The expected return in the long run for continually trying to develop new drugs is $19 million dollars.

Explanation:

We have these following probabilities for the pharmaceutical firm:

A 14% probability that the research to develop a new drug is successful, earning $750 million dollars.

An 86% probability that the research to develop a new drug is unsucessful, losing $100 million dollars.

What is the expected return in the long run for continually trying to develop new drugs?

14% probability of earning $750 million, 86% probability of losing $100 million. So

`E = 0.14*750 - 0.86*100 = 19`

The expected return in the long run for continually trying to develop new drugs is $19 million dollars.