The Beaufort Sea, located to the north of Nunavut and the Northwest Territories, is being explored for oil and natural gas by companies that conduct geological surveys and sell the resulting data to the energy companies that actually do the drilling. Alternatively, the survey company may do the drilling itself. A survey company has spent $1.6 billion on collecting geological data in a certain area of the Beaufort Sea and estimates that drilling will be successful with a probability of 0.6. Drilling costs $0.4 billion with a probability of 0.8 and $0.8 billion with a probability of 0.2, due to the fact that the survey doesn’t identify the geological structures precisely. If drilling is successful, the revenue from the sale of oil and gas will be $3.4 billion with a probability of 0.75 and $4.6 billion with a probability of 0.25 due to uncertainty about the future prices at which the company can sell the oil and gas. Alternatively, the company can conduct an auction to sell the geological data; it estimates that the data will sell for $2.1 billion with a probability of 0.65 and $2.8 billion with a probability of 0.35.

a) Based on the expected value of alternative actions, should the company drill or hold the auction?

b) What would the probability of successful drilling need to be in order to reverse your decision (to an accuracy of two significant figures)?

c) What other factors should the company take into account in addition to the expected value of the alternative actions?