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09 QM Lecture Note B Supplement

09 QM Lecture Note B Supplement - Ex.1 A wildcatter owns a...

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Ex.1 : A wildcatter owns a lease that grants him the rights to any oil discovered at a particular site. D1: Drill; D2:Form a partenership and drill; D3: Do not drill, sell the lease. Uncertainities: s1: Oil reserve exists; s2: No oil reserves. Payoff ( in thousands): s1 s2 d1 $300 -$180 d2 $100 -$20 d3 $30 $30 Prob 0.6 0.4 You may hire a soil testing company to conduct preliminary exploration. Testing company classifies the site as “Oil Rich” or “Oil Poor” Reliability of the information: P(Rich/s1)=0.90, P(Poor/s2)=0.70. P(Poor/s1)=0.10, P(Rich/s2)=0.30 Questions: a) Compute revised probabilities and show the tree, compute EV with SI=…………(ANS:$150.6) b) Show the tree for PI, and compute EV with PI=……….(ANS:$192) c) Show the tree for no information and compute EV with No information=…….(ANS:$108)
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