Question
An oil company has some land that is reported to possibly contain oil. The company classifies such land into four categories by the total number
An oil company has some land that is reported to possibly contain oil. The company classifies such land into four categories by the total number of barrels that are expected to be obtained from the well, i.e. a 500,000 barrel well, 200,000 barrel well, 50,000 barrel well, and a dry well. The company is faced with deciding whether to drill for oil, to unconditionally lease the land or to conditionally lease the land at a rate depending upon oil strike. The probability for striking a500,000 - barrel well is 0.1, probability for striking a 200,000 - barrel well is 0.15, probability for striking a50,000 - barrel is 0.25, and the probability for a dry well is 0.5.
The payoff table ($1000s) is as follows:
Decision | 500,000 Bar | 200,000 Bar | 50,000 Bar | Dry |
Drill | 650 | 200 | -25 | -75 |
Unconditional | 45 | 45 | 45 | 45 |
Conditional | 250 | 100 | 0 | 0 |
0.1 | 0.15 | 0.25 | 0.5 |
i. Compute the expected monetary value for each decision.
ii. What decision would you recommend?
iii. Develop an opportunity loss table.
iv. Compute the expected opportunity loss for each decision.
v. Compute the expected value of perfect information.
vi. What is the decision using Maximin criteria.
vii. What is the decision using minimax criteria.
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