# A pharmaceutical company has a research budget of 7 million euros. The company is considering…

A pharmaceutical company has a research budget of 7 million euros. The company is considering investing some of this budget into the development of a new vaccine. The development of the new vaccine requires an upfront investment of 1 million euros. After this investment is made, the development will succeed or fail with equal probability. If the development succeeds, the company will have to decide between selling the license of the new vaccine to another company or producing it. The license is estimated to be sold for 2 million euros. If they choose to produce it, the profit from the vaccine will depend on the demand. They will make a profit of 6 million euros if the demand is high and incur a loss of 2 million euros if the demand is low. The demand will be high with probability 0.75 and low with probability 0.25. The success of the development phase and the demand are independent. If the company chooses not to invest in the development, the research budget remains the same. The company’s primary objective in this context is to maximize the expected monetary value.

Draw a decision tree to represent this problem. Clearly label all nodes and include all relevant information. Find the optimal strategy and the maximum expected monetary value.

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