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13th Edition

Anderson

Publisher: CENGAGE L

ISBN: 9781305881884

Chapter 4, Problem 59SE

Textbook Problem

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An oil company purchased an option on land in Alaska. Preliminary geologic studies assigned the following prior probabilities.

*P*(high-quality oil) = .50

*P*(medium-quality oil) = .20

*P*(no oil) = .30

- a. What is the probability of finding oil?
- b. After 200 feet of drilling on the first well, a soil test is taken. The probabilities of finding the particular type of soil identified by the test follow.

*P*(soil | high-quality oil) = .20

*P*(soil | medium-quality oil) = .80

*P*(soil | no oil) = .20

How should the firm interpret the soil test? What are the revised probabilities, and what is the new probability of finding oil?

**a.**

To determine

Compute the probability of finding oil.

**Calculation:**

The given prior probabilities are as follows:

*Addition Law for mutually exclusive events:*

For mutually exclusive events, the addition law states that

**b.**

To determine

Explain how the firm should interpret the results. Compute the revised probabilities and new probability of finding oil.

STATISTICS F/BUSINESS+ECONOMICS-TEXT

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