Question

8. Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $50 million in net income. The probability of the FDA approving a drug is 50%. What is the expected payoff for Little Cure's ten drugs? (2 points)

A) $250 million

B) $50 million

C) $1 billion

D) $0

Answer 1

Expected Payoff of one Drug = 0.50(50) + 0.50(0)

Expected Payoff of one Drug = $25 millon

Expected Payoff of Ten Drug = 10(25)

Expected Payoff of Ten Drug = $250 million