Partial Budgets and Decision Analysis

Question 1

Types of costs

Answer 1

-fixed costs
-variable costs
-opportunity costs

Question 2

Fixed costs

Answer 2

-paid regardless of which choice is taken (eg. electric bill)
-with a short time horizon these can usually be ignored

Question 3

Variable costs

Answer 3

-vary depending on which action is taken

Question 4

Opportunity costs

Answer 4

-costs incurred by not making some other choice
*usually assume that we borrow needed funds

Question 5

Partial budgets and benefit cost analysis

Answer 5

-An attempt to forecast financial events that follow a management decision
>only use variable costs
>areas irrelevant to decision ignored
>compare two or more options
>current program is baseline

Question 6

Partial budget calculation

Answer 6

-calculate the total changes in revenues and the total change in expenses

Net revenue change- net expanse change= net profit

Question 7

Beef herd partial budget example

Answer 7

One preg cow abort to IBR. One more cow will abort if herd is not vaccinated and if vaccinated the herd will suffer no more abortions

Cows that abort are culled= $600/cow ; replace= $1000, Cull- $400

Herd=100 cows, vaccine cost=0.50$ and takes 1 hr

**Costs of two interventions only mean something when compared together.
eg. Led to $510 benefit to vaccinate.

Question 8

Decision analysis

Answer 8

A systemic method evaluating:
-future events
-consequences of actions
-likelihood of upcoming occurrences
-value of various endpoints

**money not major part; major focus is probabilities and logic

Question 9

Advantages of decision analysis

Answer 9

-explicit- forces you to formulate problem by its components
-quantitative- forces us to make precise statements about probabilities, costs, revenues
-prescriptive- helps us to choose a course of action
-what if game!- sensitivity analysis (change one factor and see if decision changes)

Question 10

Disadvantages of decision analysis

Answer 10

-simple view of complex biological systems
-decision analysis is an approx of reality
-forecasting is difficult
-can never create complete model of all aspects of a problem
-risk not considered
-best used for commonplace decisions that are made over and over

Question 11

steps of decision analysis

Answer 11

1. ID the problem and choices
   2.Structure the decision problem
2. Characterize the information needed
3. Choose a preferred course of action

Question 12

Decision Tree

Answer 12

-A graphic arrangement of the flow of events
>branches from left to right
>prob of each outcome considered
>starts with a decision node

Question 13

Decision/choice nodes

Answer 13

-indicates a clinical event over which the decision maker has control

-each node leads to one of three options:
1.another decision node
2.a chance node
3. A terminal branch or outcome

Question 14

Exhaustive vs. exclusive decision nodes

Answer 14

Exhaustive: must include all possible choices to be considered

Exclusive: only one choice is possible at node

Question 15

Chance nodes

Answer 15

The uncertain points in a decision tree
>probabilities are assigned to each branch
>probabilities of each branch add to 1

-can lead to decision node, chance node, or terminal branch

Question 16

Path

Answer 16

Represents a stream of events over time
>bounded by a decision node and by a final outcome event; in between can have number of decision nodes and chance nodes

Question 17

Terminal branches

Answer 17

-Far right of decision tree
-each has a outcome specific to that chain of events in that branch
-outcome value is assigned to each terminal branch

Question 18

Outcome values

Answer 18

Various endpoints must be differentiated to be of use
-usually done by assigning cash value, or utilities

Question 19

Calculation of expected value

Answer 19

Expected value= value of branch X probability it occurs

**expected value at the node= sum of expected values of all branches at the node. Only get this from working all the way backwards

Question 20

Maximum profit

Answer 20

The best decision is the branch with the highest expected value