a. Some oil speculators are interested in drilling an oil well. The rights to the land have been secured and they must decide whether to drill. The states of nature are that oil is present or that no oil is present. Their two decision alternatives are drill or don’t drill. If they strike oil, the well will pay $1 million. If they have a dry hole, they will lose $100,000. If they don’t drill, their payoffs are $0 when oil is present and $0 when it is not. The probability that oil is present is 0.11. Use this information to construct a decision table and compute an EMV for this problem.
b. The speculators have an opportunity to buy a geological survey, which sometimes helps in determining whether oil is present in the ground. When the geologists say there is oil in the ground, there actually is oil 0.20 of the time. When there is oil in the ground, 0.80 of the time the geologists say there is no oil. When there is no oil in the ground, 0.90 of the time the geologists say there is no oil. When there is no oil in the ground, 0.10 of the time the geologists say there is oil. Use this information to revise the prior probabilities of oil being present in the ground and compute the EMV based on sample information. What is the value of the sample information for this problem?