The Mobile Oil company has recently acquired oil rights to a new potential source of natural oil in Alaska. The current market value of these rights is $90,000. If there is natural oil at the site, it is estimated to be worth $800,000; however, the com- pany would have to pay $100,000 in drilling costs to extract the oil. The company believes there is a 0.25 probability that the proposed drilling site actually would hit the natural oil reserve. Alternatively, the company can pay $30,000 to first carry out a seismic survey at the proposed drilling site. The probability of a favorable seismic survey when oil is present at the drilling site is 0.6. The probability of an unfavor- able seismic survey when no oil is present is 0.80. a. What is the probability of a favorable seismic survey? b. What is the probability of an unfavorable seismic survey? c. Construct a decision tree for this problem. d. What is the optimal decision strategy using the EMV criterion?
Contingency Table
A contingency table can be defined as the visual representation of the relationship between two or more categorical variables that can be evaluated and registered. It is a categorical version of the scatterplot, which is used to investigate the linear relationship between two variables. A contingency table is indeed a type of frequency distribution table that displays two variables at the same time.
Binomial Distribution
Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.
The Mobile Oil company has recently acquired oil rights to a new potential source of natural oil in Alaska. The current market value of these rights is $90,000. If there is natural oil at the site, it is estimated to be worth $800,000; however, the com- pany would have to pay $100,000 in drilling costs to extract the oil. The company believes there is a 0.25
a. What is the probability of a favorable seismic survey?
b. What is the probability of an unfavorable seismic survey?
c. Construct a decision tree for this problem.
d. What is the optimal decision strategy using the EMV criterion?
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