4. (15 marks) It is known that oil exists beneath the surface at a particular location,...

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4. (15 marks) It is known that oil exists beneath the surface at a particular location, but it is not known if it's just a small pool of oil (this has a 90% probability), or if there's a large pool of oil. A small pool is worth only $500,000, but a large pool would be worth $12 million. To drill (which will determine the size of the pool) would cost $2,000,000. If they do not drill, an $80,000 environmental inspection fee will be refunded to them. A seismic test is available at a cost of $45,000; the result will be either “positive" or “negative". If a large pool of oil is present then there's an 80% chance of a positive result; if there's just a small pool present then there's a 30% chance of a positive result. Draw and solve a decision tree to determine a recommendation for this situation. 4. (15 marks) It is known that oil exists beneath the surface at a particular location, but it is not known if it's just a small pool of oil (this has a 90% probability), or if there's a large pool of oil. A small pool is worth only $500,000, but a large pool would be worth $12 million. To drill (which will determine the size of the pool) would cost $2,000,000. If they do not drill, an $80,000 environmental inspection fee will be refunded to them. A seismic test is available at a cost of $45,000; the result will be either “positive" or “negative". If a large pool of oil is present then there's an 80% chance of a positive result; if there's just a small pool present then there's a 30% chance of a positive result. Draw and solve a decision tree to determine a recommendation for this situation.

Answer rating: 100% (QA)

Decision Tree all payoffs are in million PS ... View the full answer