Question

part b please

2. The FDA approves drugs when the drug has a beneficial effect in a controlled experi ment, based on a one-sided 5% level test with Ho, the drug has no effect. A drug company has developed a new painkiller for chronic pains, although it is doubtful whether the new drug actually has any effect. The company conducts a double-blind ex- periment with n-298 randomly chosen chronic pain patients over a 6 months period. All patients receive the drug for 3 consecutive months and the placebo for 3 consecutive months but the order of the drug/placebo treatment is unknown to them and to the administering doctor. During the two 3 months periods, patients report their level of pain on a scale from 0 to 10 (higher numbers indicate more pain). For each patient, let d, be the difference in the level of pain between the placebo treatment period and the drug treatment period (such that positive values of d, indicate that the patient felt better while taking the drug) (a) The outcome of the trial is such that d-n-1 Σ4-0.14 and s.-V-i Σ(4-d- 2.9. Will the company get the drug approved by the FDA based on this study, using a one- sided hypothesis test at the 5% level? b) Suppose conducting a study as described above costs $10 million, and getting the drug approved yields profits of $800 million (gross of the costs of the study). (bl) If the drug company knows that the new drug has no effect, would it still make sense for the company to conduct a study in the hope of finding a significant effect? Compute the expected profit of such a strategy. (b2) Drug companies are not forced to divulge all studies they performed to the FDA Suppose a drug company knows that the drug has no effect and followed the strategy de- scribed in (bl), but the study comes back insignificant. Should the drug company try again, i.e. perform another study? (b3) Suppose the drug company has the policy of conducting at most three studies (at most, since as soon as a study yields a significant effect, the company gets the drug approved and no further studies are conducted). If the drug has no effect, what is the distribution of the profits arising from this policy? Compute the expectation of that distribution.

Answer 1

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Page No: Date Cos $40 million .キ Yo millien Gps mht ,46 millon 2 omilli c s miln