Compare the advantages and disadvantages of a payoff table as compared to a decision tree.

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Chapter 20, Problem 26PS

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Compare the advantages and disadvantages of a payoff table as compared to a decision tree.

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Mrs Moore is a agriculturalist and would like to drill for water on her farm. She needs water for irrigation and estimates the benefits of having a successful borehole as $2.0m. However, there is only a 10% chance that she will strike water if she drills and the cost of drilling is $100 000. The alternative is not to drill at all, in which case the benefit will be zero. Draw a decision tree to represent the problem. Should Mrs Moore go ahead and drill? There is another agriculturalist in a nearby state who claims to have supernatural powers to indicate underground water sources. However, he charges a fee and also travel cost. What is the most Mrs Moore should pay for the services? Before Mrs Moore drills, she could also consult a geologist who can assess the promise of the piece of land. He can tell her whether the prospects are “good” or “poor.” But he is not a perfect predictor. If there is water, the conditional probability is 0,95 that he will say that prospects are good. If…