Extreme Drilling is faced with a two-tiered decision problem: Should it make a blind decision on whether or not to drill in a particular location in the Fullerton oil field in Texas, or should it invest in seismic data before making the drilling decision? Extreme Drillings situation is typical in the oil industry, as advances in seismic technology and reservoir modeling have resulted in more detailed and more accurate, albeit imperfect, information from seismic surveys.

(Stephen Pickering and J. Eric Bickel explain how seismic data is used in the oil industry in The Value of Seismic Information, Oil and Gas Financial Journal, May 2006.)

Extreme Drillings decision problem is captured in the following incomplete decision tree:

Given the price of oil and the volume of liquid in the drilling target, Extreme Drilling's revenue from a successful well is $16 million. Its drilling costs are $13 million. Enter the payoffs at the ends of the branches on the decision tree. Use Extreme Drilling's profit as its payoff. Ignore the potential costs of the seismic survey (that is, assume for now that the seismic survey costs are $0).

Suppose that P(O) = 0.66, P("O") = 0.60, P(O | "O") = 0.88, and P(O | "W") = 0.35. Use these values for the prior and posterior probabilities to enter all the branch probabilities on the decision tree.

2, If Extreme Drilling does not order a seismic survey, the optimal decision is to ? not drill/ drill . this decision provides an expected monetary value of ? $0/$2.44million /$10,56 million/$6.14 million

If Extreme Drilling commissions a seismic survey and the survey reports oil, the optimal decision is to drill/ not drill , and this decision provides an expected monetary value of $0/$7.14m/$-1.08 m /$1.08m/$2.64m . If the survey reports water, the optimal decision is to drill/ not drill , and this decision provides an expected monetary value of $0/$7.14m/$-1.08 m /$1.08m/$2.64 m .

Extreme Drilling should be willing to pay up to $648000/$432000/$1.792m/$6.752m for the information from the seismic survey.

Extreme Drilling is faced with a two-tiered decision problem: Should it make a blind decision on whether or not to drill in a particular location in the Fullerton oil field in Texas, or should it invest in seismic data before making the drilling decision? Extreme Drilling's situation is typical in the oil industry, as advances in seismic technology and reservoir modeling have resulted in more detailed and more accurate, albeit imperfect, information from seismic surveys. (Stephen Pickering and J. Eric Bickel explain how seismic data is used in the oil industry in "The Value of Seismic Information," Oil and Gas Financial Journal, May 2006.) Extreme Drilling's decision problem is captured in the following incomplete decision tree: Let O= the well hits oil, W= the well hits water, " O= the seismic survey reports oil, and " W " = the seismic survey reports water. Extreme Drilling is faced with a two-tiered decision problem: Should it make a blind decision on whether or not to drill in a particular location in the Fullerton oil field in Texas, or should it invest in seismic data before making the drilling decision? Extreme Drilling's situation is typical in the oil industry, as advances in seismic technology and reservoir modeling have resulted in more detailed and more accurate, albeit imperfect, information from seismic surveys. (Stephen Pickering and J. Eric Bickel explain how seismic data is used in the oil industry in "The Value of Seismic Information," Oil and Gas Financial Journal, May 2006.) Extreme Drilling's decision problem is captured in the following incomplete decision tree: Let O= the well hits oil, W= the well hits water, " O= the seismic survey reports oil, and " W " = the seismic survey reports water