Accession Number : AD0820657

Title :   THE CRITICAL REGION IN RELATIVE COST-EFFECTIVENESS.

Descriptive Note : Research document,

Corporate Author : RESOURCE MANAGEMENT CORP BETHESDA MD

Personal Author(s) : Reynolds, W. E.

Report Date : JUN 1967

Pagination or Media Count : 35

Abstract : Cost-effectiveness analysis and its counterpart, cost-benefit analysis, are widely recognized as among the best analytic approaches to many types of decision-making problems. One of the most difficult problems faced by the analyst working in the area of defense problems has been satisfying one of the DoD requirements for an evaluation of competing systems-namely, that the 'cost-effectiveness of the proposed item is favorable in relationship to that of competing items. This problem, which will be referred to as the relative cost-effectiveness problem, is usually approached by showing that Alternative A is preferred to Alternative B under a given set of conditions. A sensitivity analysis is then run on the variables to determine whether small changes in the values assigned the variables will change the relative ranking. This document describes an alternative approach to the relative cost-effectiveness problem. Instead of seeking the favored system under a given set of conditions, this approach seeks to identify the conditions under which Alternative A is preferred to Alternative B. These conditions are defined in terms of a 'boundary' of preferredness: the boundary, which is critical in the choice between the alternative systems, consists of system characteristics that indicate system merit. The values of these system characteristics generally have some uncertainty associated with them, and when this is the case, the critical boundary becomes a 'critical region.' The general methodology will be discussed first, and will then be demonstrated with two examples-a simple hypothetical competition between two artillery shells and a more complex comparison of interdiction aircraft.

Descriptors :   (*COST EFFECTIVENESS, TEST METHODS), OPERATIONS RESEARCH, DECISION THEORY, BOUNDARY VALUE PROBLEMS, PROJECTILES, COSTS, KILL PROBABILITIES, TACTICAL WEAPONS, MATHEMATICAL MODELS.

Subject Categories : Economics and Cost Analysis

Distribution Statement : APPROVED FOR PUBLIC RELEASE