44. The senior executives of an oil company are trying todecide whether to drill for oil in a particular field inthe Gulf of Mexico. It costs the company $1,500,000to drill in the selected field. Company executives believe that if oil is found in this field its estimated valuewill be $5,400,000. At present, this oil company believes that there is a 40% chance that the selected fieldactually contains oil. Before drilling, the companycan hire a geologist at a cost of $120,000 to performseismographic tests. Based on similar tests in otherfields, the tests have a 30% false negative rate (no oilpredicted when oil is present) and a 25% false positiverate (oil predicted when no oil is present).a. Assuming that this oil company wants tomaximize its expected net earnings, use a decisiontree to determine its optimal strategy.b. Calculate and interpret EVI for this decision problem. Experiment with the accuracy probabilitiesof the geologist to see how EVI changes as theychange.c. Calculate and interpret EVPI for this decisionproblem.
Unitary Method
The word “unitary” comes from the word “unit”, which means a single and complete entity. In this method, we find the value of a unit product from the given number of products, and then we solve for the other number of products.
Speed, Time, and Distance
Imagine you and 3 of your friends are planning to go to the playground at 6 in the evening. Your house is one mile away from the playground and one of your friends named Jim must start at 5 pm to reach the playground by walk. The other two friends are 3 miles away.
Profit and Loss
The amount earned or lost on the sale of one or more items is referred to as the profit or loss on that item.
Units and Measurements
Measurements and comparisons are the foundation of science and engineering. We, therefore, need rules that tell us how things are measured and compared. For these measurements and comparisons, we perform certain experiments, and we will need the experiments to set up the devices.
44. The senior executives of an oil company are trying to
decide whether to drill for oil in a particular field in
the Gulf of Mexico. It costs the company $1,500,000
to drill in the selected field. Company executives believe that if oil is found in this field its estimated value
will be $5,400,000. At present, this oil company believes that there is a 40% chance that the selected field
actually contains oil. Before drilling, the company
can hire a geologist at a cost of $120,000 to perform
seismographic tests. Based on similar tests in other
fields, the tests have a 30% false negative rate (no oil
predicted when oil is present) and a 25% false positive
rate (oil predicted when no oil is present).
a. Assuming that this oil company wants to
maximize its expected net earnings, use a decision
tree to determine its optimal strategy.
b. Calculate and interpret EVI for this decision problem. Experiment with the accuracy probabilities
of the geologist to see how EVI changes as they
change.
c. Calculate and interpret EVPI for this decision
problem.
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