Question: Although you cannot resolve all the uncertainty about whether the site contains oil, you can gather some information. In particular, you can do seismic testing.
Although you cannot resolve all the uncertainty about whether the site contains oil, you can gather some information. In particular, you can do seismic testing. In this procedure, one sets off explosives on the ocean floor and measures the seismic waves at other points on the ocean floor. From the seismic data, one can construct a 3D image of the subsurface geology and see if there are structures that may form an oil reservoir. Your geologists estimate that most (90%) of the wet sites have structures that can be detected by this seismic test. However many (60%) of the dry sites also have these structures.
What is the probablity the site is "wet" if the site has these structures, i.e. what is P(Wet|Structure)?
What is the probablity that the site is "wet" if the site does not have the structues, i.e. what is PWet|No Structure)?
The seismic test costs $2.5 million. Do you want to do the test? Explain why or why not.
How does EV of doing the seismic test first change as wet probability changes?
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