Question
OilCorp is planning for their 2017 operations and needs to begin resource planning depending on the level of oil exploration they are interested in. They
OilCorp is planning for their 2017 operations and needs to begin resource planning depending on the level of oil exploration they are interested in. They can pump 100,000 barrels of oil at $22 each, 125,000 barrels at $20.50 each, or 200,000 barrels at $16 each. Additionally, they have fixed costs of $25,000 for weak operations, $100,000 for moderate operations, or $850,000 for strong operations. The summary of their operational costs are: Production Status Production Level (# Barrels) Cost Per Barrel + Fixed Costs "Weak" 100,000 $ 22.00 $ 25,000 "Moderate" 125,000 $ 20.50 $ 100,000 "Strong" 200,000 $ 16.00 $ 850,000 Depending on market demand, they can sell each barrel for $16.50. $22, or $25, for low market demand, medium market demand, or high market demand, respectively. Economics forecast probabilities for market demand as follows: 35% for low, 20% for medium, and 45% for high. The company must operate using one of the production statuses above. Production status levels should not be confused for market demand levels. Start the problem by identifying total costs associated with each decision, and understanding the parameters associated with revenue. 1) What are the total costs associated with each operational level? 2) Construct a payout matrix. 3) Contract a decision tree. 4) What decision should be made based on EMV? 5) Construct a regret matrix.
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