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