The Food and Drug Administration has veto power over the choice of drug names. In 2004, it used this power regularly, rejecting 36% of the names proposed by companies for reasons such as sounding too much like another product (and causing confusion at the pharmacy). Suppose that a company spends +500,000 developing each proposed name, but there’s a 50-50 chance of a name being rejected.6
(a) If the review of names occurs independently, what is the probability that the company will spend more than +1 million developing a name?
(b) What is the expected cost of developing a name? [Hint: For any value x and
0 ≤ P < 1, p + 2p2 + 3p3 + . = p / (1 – p)2.]