Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

hiiii! i'm having trouble performing a sensitivity analysis for a change in price payoff and changes to probability in a state of nature. i've done

hiiii! i'm having trouble performing a sensitivity analysis for a change in price payoff and changes to probability in a state of nature.

i've done part 1 of this question, but i'm stuck on proceeding with the second question on sensitivity analysis. part 1 is included for context.

(1) Mobon Oil Company owns a lease that entitles it to explore for oil on a parcel of offshore land in California. Since the lease is about to expire, Mobon must now decide whether to drill for oil at the site or to sell the lease to Exxil Oil Company, which has offered Mobon $50,000. Mobon estimates that it would cost $100,000 to drill at the site. If the well were dry, all this cost would be lost. If the well were successful, its value to Mobon would depend on the extent of the oil discovered. For simplicity, Mobon assumes there are only two types of successful wells: a minor success and a major success. Mobon estimates that a minor success would result in revenues of $200,000 in excess of the drilling costs, whereas a major success would result in revenues of $600,000 in excess of the drilling cost. Mobon has assessed the following probabilities:

Type of Well: Dry / Minor Success / Major Success

Probability: 0.7 / 0.2 / 0.1

(a) Construct an appropriate payoff matrix.

(b) Using the Maximax criterion, identify the optimal decision.

(c) Using the Maximin criterion, identify the optimal decision.

(d) Using the Minimax Regret criterion, identify the optimal decision.

(e) Using the Expected Money Value (EMV) criterion, identify the optimal decision.

(f) Using the Expected Regret criterion, identify the optimal decision. and verify that it is the same optimal decision as in part (e).

(g) Construct a decision tree for this problem, prune the decision tree using the EMV criterion, and verify that you have reached the same optimal decision as in part (e).

(h) Using the Regret table from part (f) and a decision tree analysis in part (e), compute the Expected Value of Perfect Information EVPI for this problem and verify you obtain the same result.

(2) Reconsider Mobon's decision problem in (1) above.

(a) Assuming all other data remain unchanged, perform a sensitivity analysis on the amount Exxil offers to buy the lease.

(b) Assuming all other data remain unchanged, perform a sensitivity analysis on Mobon's estimate of the cost to drill for oil at the site. Use a graphical analysis within your answer.

(c) Assuming all other data remain unchanged, perform a sensitivity analysis on Mobon's estimate of the probability of a dry well (currently 0.70). Use a graphical analysis within your answer.

thank you so much for your help!!!!

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored 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

Recommended Textbook for

Land Economics Research

Authors: Joseph Ackerman, Marion Clawson, Marshall Harris

1st Edition

1317340426, 9781317340423

More Books

Students also viewed these Economics questions

Question

How to find if any no. is divisble by 4 or not ?

Answered: 1 week ago