Optimum policy

The Bonsante Drug Company is aiming to develop a new drug which will alleviate the symptoms of arthritis with few side effects. The earlier the company can develop, test and market the drug, the greater will be the returns they will earn in a market which it is thought will be worth billions of pounds. Two alternative technologies for developing the drug are being considered and, given the resources available to the company, only one of these approaches can be pursued at a given time. The first approach is based on a substance called HMP acid and it is estimated that there is a 0.4 probability that this approach would lead to development of the drug in 5 years, with a 0.6 probability that the development would take 7 years.

There is more uncertainty about the development time of the second approach, which is based on a derivative of the chemical, zymogens. It is estimated that the use of this chemical has a 0.3 probability of leading to completion of development in as little as 3 years. If development has not been completed in this period then a decision would have to be made between switching to the HMP acid technology or attempting to modify the zylogen approach. It is thought that the modification has a 0.8 probability of leading to completion after a further 2 years. If the modification has still not led to completion after the further 2 years a decision would then have to be made between switching to the HMP acid approach or persevering with zylogen for a further 7 years, by which time it is assumed that successful development is certain to have been achieved.

Assuming that the objective of Bonsante”s directors is to minimize the expected development time of the drug, determine their optimum policy.

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