A pharmaceutical company has a new drug under development and would like to know how much profit it might expect to make. The drug has to be tested to pass FDA approval. One hundred subjects will be tested and the company estimates that the probability that each subject will pass the test is 25 percent. The FDA will approve the drug if at least 20 out of the 100 subjects pass.

Future R&D costs will be between $3 and $5 million (uniformly distributed). Advertising costs will run between $12 and $18 million, with $16 million the most likely amount. The total population of potential users of the drug is 40 million. The company expects to gain 8 percent of this market if its drug is successful. (Assume a normal distribution for market share with a standard deviation of 2 percent.)

There is a one-in-four chance of a competitor entering this market, and if it does, the monopoly share will be reduced by 5 to 15 percent (uniformly distributed). The profit per customer is expected to be $12.

a. What is the mean profit? 

b. What is the probability the company makes no profit at all?

c. What is the maximum profit they can make?

Answer rating: 100% (QA)

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