Oil Drilling Problem with Solution

Oil Drilling - charge $5,000 for his services What should the company do Draw a decision tree that represents the decision making situation(b The

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$135,000 $35,000 $35,000 $0 $16,100 $49,500 -$50,500 $11,100 $0 $0 $90,000 -$10,000 $0 $0 $0 DECISION TREE PROBLEM A company is considering drilling an oil well. Probability of finding oil is 0.2. The value of oil if oil is found is estimated to be $450,000. Cost of drilling the well is estimated to be $100,000. (a) What should the company do.
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(a) The Decision Tree $450,000 Oil 0.2 2 No Oil Drill 0.8 Cost $100,000 $0 1 Don’t Drill $0
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(a) Tree with the solution 0.2($450,000) + 0.8($0) = $90,000 Oil $450,000 0.2 2 - $10,000 No Oil Drill 0.8 Cost $100,000 $0 1 $0 Don’t Drill $0 Ans. Best decision at decision node 1 is “Don’t drill”
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(b) The company could also hire a geologists who based on his knowledge and experience could tell management if he believes there is oil. Need less to say, the recommendation of the geologists represents an opinion. The geologists will
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Unformatted text preview: charge $5,000 for his services. What should the company do? Draw a decision tree that represents the decision making situation (b) The revised Decision Tree Drill Oil $450,000 1 0.3 $100,000 2 No Oil $0 0.7 Predicts Don’t Drill Oil 0.46 $0 Oil 0.11 $450,000 Hire 6 $5,000 Drill Predicts 0.54 $100,000 3 No Oil 4 No Oil $0 0.89 8 Don’t Drill $0 Oil $450,000 Drill 0.2 Don’t $100,000 5 Hire No Oil $0 7 0.8 Don’t Drill $0 (b) The revised Decision Tree with solution Drill Oil $450,000 1 0.3 $100,000 2 No Oil $0 0.7 Predicts Don’t Drill Oil 0.46 $0 Oil 0.11 $450,000 Hire 6 $5,000 Drill Predicts 0.54 $100,000 3 No Oil 4 No Oil $0 0.89 8 Don’t Drill $0 Oil $450,000 Drill 0.2 Don’t $100,000 5 Hire No Oil $0 7 0.8 Don’t Drill $0...
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This note was uploaded on 04/09/2010 for the course GSC 3600 taught by Professor Verma during the Winter '10 term at Wayne State University.

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Oil Drilling - charge $5,000 for his services What should the company do Draw a decision tree that represents the decision making situation(b The

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