Question 2An oil company must decide whether or not to drill an oil well in a particular area that they alreadyown. The decision maker (DM) believes that the area could be dry, reasonably good or a bonanza.See data in the table which shows the gross revenues for the oil well that is found.DecisionDrill$0Abandon$0Probability 0.3Dry (D)Seismic ResultsNo structure(N)Open(0)Closed (C)Reasonablygood(G)$85$00.3Drilling costs 40M. The company can take a series of seismic soundings at a cost of 12M) todetermine the underlying geological structure. The results will be either "no structure", "openstructure or "closed structure". The reliability of the testing company is as follows that is, thisreflects their historical performance.Bonanza(B)Note that if the test result is "no structure" the company can sell the land to a developer for 50 m.otherwise (for the other results) it can abandon the drilling idea at no benefit to itself.$200 m$00.4Dry(d)0.70.20.1Conditional Probability for a given state of natureReasonably good(g)0.30.30.4Bonanza(b)0.10.40.5 That is P (N/D)=0.7; P (O/G)=0.3, P(C/B) =0.5After you have computed the revised probabilities round to two decimal placesa) Construct the appropriate decision tree to help the oil company make the appropriatedecisions. This tree must be constructed in logical order with labels and net payoffs. Italso includes the revised probabilities.b) Fold back the decision tree to determine the best strategy for the company; you must statethis strategy. What is the final expected profit?c) What is the expected value of sample information (EVSI)- the most that should be paid toseismic testing firm for the test?d) Calculate the expected value of perfect information (EVPI)- the most that should be paidto an expert for perfect prediction of the uncertain outcomes.e) What is the efficiency of sample information?

P(D) = Prior probability of dry state of nature = 0.3 P(G) = Prior probability of reasonably good…

Answered: Question 2 An oil company must decide…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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