As CEO of firm A, you and your management team face the decision ofwhether to undertake a $200 million R&D effort to create a new mega-medicine. Your research scientists estimate that there is a 40 percentchance of successfully creating the drug. Success means securing aworldwide patent worth $550 million (implying a net profit of $350million). However, firm B (your main rival) has just announced that it isspending $150 million to pursue development of the same medicine (bya scientific method completely independent of yours). You judge that B’schance of success is 30 percent. Furthermore, if both firms aresuccessful, they will split equally the available worldwide profits ($275 million each) based on separate patents.A. Suppose that firm A and firm B can form a joint venture topursue either or both of their R&D programs. What is the expectedprofit of simultaneously pursuing both programs? (Hint: Be sure tocompute the probability that both efforts fail(in which case the firms’combined loss is 200 + 150 = $350 million.).
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