A nuclear power company is deciding whether or not tobuild a nuclear power plant at Diablo Canyon or at RoyRogers City. The cost of building the power plant is $10million at Diablo and $20 million at Roy Rogers City. If thecompany builds at Diablo, however, and an earthquakeoccurs at Diablo during the next five years, constructionwill be terminated and the company will lose $10 million(and will still have to build a power plant at Roy RogersCity). A priori, the company believes there is a 20% chancethat an earthquake will occur at Diablo during the next fiveyears. For $1 million, a geologist can be hired to analyze thefault structure at Diablo Canyon. He will either predict thatan earthquake will occur or that an earthquake will notoccur. The geologist’s past record indicates that he willpredict an earthquake on 95% of the occasions for which anearthquake will occur and no earthquake on 90% of theoccasions for which an earthquake will not occur. Shouldthe power company hire the geologist? Also find EVSI andEVPI.
A nuclear power company is deciding whether or not to
build a nuclear power plant at Diablo Canyon or at Roy
Rogers City. The cost of building the power plant is $10
million at Diablo and $20 million at Roy Rogers City. If the
company builds at Diablo, however, and an earthquake
occurs at Diablo during the next five years, construction
will be terminated and the company will lose $10 million
(and will still have to build a power plant at Roy Rogers
City). A priori, the company believes there is a 20% chance
that an earthquake will occur at Diablo during the next five
years. For $1 million, a geologist can be hired to analyze the
fault structure at Diablo Canyon. He will either predict that
an earthquake will occur or that an earthquake will not
occur. The geologist’s past record indicates that he will
predict an earthquake on 95% of the occasions for which an
earthquake will occur and no earthquake on 90% of the
occasions for which an earthquake will not occur. Should
the power company hire the geologist? Also find EVSI and
EVPI.
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