Case Study ( Please include the decision trees) Biotechnical
Engineering specializes in developing new chemicals for
agricultural applications. The company is a pioneer in using the
sterile-male procedure to control insect infestations. It operates
several laboratories around the world that raise insects and expose
them to extra-large doses of radiation, making them sterile. As an
alternative to chlorinated hydrocarbon pesticides, such as DDT, the
sterile-male procedure has been used frequently with a good track
record of success, most notably with the Mediterranean fruit fly
(or Medfly). That pest was controlled in California through the
release of treated flies on the premise that the sterile male flies
would compete with fertile wild males for mating opportunities. Any
female that has mated with a sterile fly will lay eggs that do not
hatch. The California Medfly campaigns required about five
successive releases of sterile males—at intervals timed to coincide
with the time for newly hatched flies to reach adulthood—before the
Medfly was virtually eliminated. (Only sterile flies were
subsequently caught in survey traps.) The effectiveness of the
sterile-male procedure was enhanced by the release of malathion
poisonous bait just a few days before each release, cutting down on
the number of viable wild adults. More recently, Biotechnical
Engineering has had particular success in using genetic engineering
to duplicate various insect hormones and pheromones (scent
attractants). Of particular interest is the application of such
methods against the Gypsy Moth, a notorious pest that attacks
trees. The company has developed synthetic versions of both
hormones and pheromones for that moth. It has a synthetic sexual
attractant that male moths can detect at great distances. Most
promising is the synthetic juvenile hormone. The juvenile hormone
controls moth metamorphosis, determining the timing for the trans-
formation of a caterpillar into a chrysalis and then into an adult.
Too much juvenile hormone wreaks havoc with this process, causing
caterpillars to turn into freak adults that cannot reproduce.
Biotechnical Engineering has received a government contract to test
its new technology in an actual eradication campaign. The company
will participate in a small-scale campaign against the Gypsy Moth
in the state of Oregon. Because the pest is so damaging, Dr. June
Scribner, the administrator in charge, is considering using DDT as
an alternative procedure. Of course, that banned substance is only
available for government emergency use because of the environmental
damage it may cause. In addition to spraying with DDT, two other
procedures may be employed: (1) using Biotechnical’s scent lure,
followed by the release of sterile males, and (2) spraying with the
company’s juvenile hormone to prevent larvae from developing into
adults. Dr. Scribner wants to select the method that yields the
best expected payoff, described below. Although both of the newer
procedures are known to work under laboratory conditions, there is
some uncertainty about successful propagation of the chemicals in
the wild and about the efficacy of the sterile-male procedure with
moths. If the scent-lure program is launched at a cost of $5
million, Biotechnical claims that it will have a fifty-fifty chance
of leaving a low number of native males versus a high number. Once
the results of that phase are known, a later choice must be made to
spray with DDT or to release sterile males; the cost of the
sterilization and delivery of the insects to the countryside is an
additional $5 million. But if this two- phase program is
successful, the net present value of the worth of trees saved is
$30 million, including the benefit of avoiding all other forms of
environmental damage. The indigenous moth population would be
destroyed, and a new infestation could occur only from migrants.
Biotechnical’s experience with other eradication programs indicates
that if the scent lure leaves a small native male population, there
is a 90% chance for a successful eradication by using sterile
males; otherwise, there is only a 10% chance for success by using
sterile males. A failure results in no savings. The cost of
synthesizing enough juvenile hormone is $3 million. Biotechnical
maintains that the probability that the hormone can be effectively
disseminated is only 0.20. If it works, the worth of the trees
saved and environmental damage avoided will be $50 million. This
greater level of savings is possible because of the permanent
nature of the solution because a successful juvenile hormone can
then be applied wherever the moths are known to exist, virtually
eliminating the pest from the environment. But if the hormone does
not work, the DDT must still be used to save the trees. DDT
constitutes only a temporary solution, and the worth of its savings
in trees is far less than the worth of either of the esoteric
eradication procedures—if they prove successful. To compare
alternatives, Dr. Scribner proposes using the net advantage (crop
and environmental savings, minus cost) relative to where she would
be were she to decide to use DDT at the outset or were she to be
forced to spray with it later. (Regardless of the outcome,
Biotechnical will be reimbursed for all expenditures. The decision
is hers, not the company’s.) Questions 1. Under Biotechnical’s
proposal, the selection of DDT without even trying the other
procedures would lead to a neutral outcome for the government,
having zero payoff. Discuss the benefits of Dr. Scribner’s proposed
payoff measure. 2. Construct Dr. Scribner’s decision tree diagram,
using the proposed payoff measure. 3. What action will maximize Dr.
Scribner’s expected payoff? 4. Dr. Scribner is concerned about the
assumed fifty-fifty probability for the two levels of surviving
native males following the scent-lure program. a. Redo the decision
tree analysis to find what action will maximize Dr. Scribner’s
expected payoff when the probability of low native males is,
successively, (1) 0.40 or (2) 0.60 instead. b. How is the optimal
action affected by the probability level assumed for the low native
male outcome? Dr. Scribner is concerned about the assumed 0.20
probability for the dissemination success of the juvenile hormone.
a. Keeping all other probabilities and cash flows at their original
levels, redo the decision tree analysis to find what action will
maximize Dr. Scribner’s expected payoff when the probability of
juvenile hormone success is, successively, (1) 0.15 or (2) 0.25
instead. b. How is the optimal action affected by the probability
level assumed for the juvenile hormone’s success? Dr. Scribner is
concerned about the assumed probability levels for the success of
the sterile- male procedure. a. Keeping all other probabilities and
cash flows at their original levels, redo the decision tree
analysis to find what action will maximize Dr. Scribner’s expected
payoff when the sterile- male success probabilities are instead as
follows: 7. (1) 80% for a low number of native males and 5% for a
high number of native males (2) 70% for a low number of native
males and 15% for a high number of native males b. How is the
optimal action affected by the probability level assumed for the
success of the sterile-male procedure? Dr. Scribner is concerned
about the assumed levels for the net present value of the worth of
trees saved and damage avoided. She believes these amounts are only
accurate within a range of ±10%. a. Keeping all other probabilities
and cash flows at their original levels, redo the decision tree
analysis to find what action will maximize Dr. Scribner’s expected
payoff when the two net present values are instead, successively,
(1) 10% lower or (2) 10% higher than originally assumed. b. How is
the optimal action affected by the level assumed for the NPVs of
the savings from using one of the two esoteric Gypsy Moth
eradication procedures?