Answered step by step
Verified Expert Solution
Link Copied!

Question

00
1 Approved Answer

A nuclear power company is deciding whether to build a nuclear plant at Chico Canyon or at Pleasantville. The cost of building the power plant

A nuclear power company is deciding whether to build a nuclear plant at Chico Canyon or at Pleasantville. The cost of building the power plant is $14 million at Chico and $20 million at Pleasantville. If the company builds at Chico, however, and an earthquake occurs at Chico during the next 5 years, construction will be terminated and the company will lose $14 million (and will still have to build a power plant at Pleasantville). Without further information, the company believes there is a 20% chance that an earthquake will occur at Chico during the next 5 years. Suppose that an actual (not perfectly reliable) geologist can be hired to analyze the earthquake risk. The geologists past record indicates that he will predict an earthquake on 90% of the occasions for which an earthquake will occur and no earthquake on 85% of the occasions for which an earthquake will not occur. Given this information, What is the maximum amount the company can pay the geologist?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions