An 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)Drilling 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.Reasonablygood(G)$85$00.3Note 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.Dry(d)0.70.2Bonanza(B)0.1$200 mSO0.4Conditional Probability for a given state of natureb) Fold back the decision treemust state this strategyReasonably good(g)0.30.30.4Bonanza(b)0.10.40,5That 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 payoffsIt also includes the revised probabilitiesto determine the best strategy for the company; youWhat is the final expected profit?

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

Answered: An oil company must decide whether or…

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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A. A company wants to produce a souvenir with a marketing life of six months. Uncertainty surrounds the likely sales volume as well as the fixed costs of the venture as shown below: Sales units Probability Contrn. /unit Probability Fixed cost K7 K5 100 000 0.3 80 000 0.6 60 000 0.1 1.0 0.5 0.5 1.0 Determine the expected value of the contribution K400 000 K450 000 K500 000 Probability 0.2 0.5 0.3 1.0
Sarah has been custom manufacturing sweaters now for 7 years. Her annual sales are shown below. Year Sales 1 178 2 215 3 233 4 301 5 337 6 330 7 361 What are her forecasted sales for year 8 using a 3 year moving average? What are her forecasted sales for year 8 using a 5 year weighted average where w1=.4, w2=.3, w3=.15, w4=.1, w5=.05? What are her forecasted sales for year 8 using exponential smoothing? Assume year 7 forecast was 323. Select your own alpha. Which forecast method is the best for Sarah to use based on MAD? Why?
A company has the following alternatives for investment. Using the incremental B/C method, determine which alternative should be selected. Assumei = 10%. А В C Cost new $20,000 $24,000 $16,000 Annual O&M Cost $1,000/yr $800/yr $2,200/yr Annual income $5,600/yr $5,700/yr $5,400/yr Estimated life (yr) 7 9. Note: Incremental B/C method should be used in the solution. Solutions by using other methods will not be graded.
MegaJoy Corp. is planning to open a new video arcade. It has narrowed the choices to a large or small arcade.(All costs and revenues in this problem are expressed in thousands of dollars.) The cost of a large arcade is $400, and the cost of a small arcade is $300．It has forecast that the demand will be low with probability 0.3 and high with probability 0.７．If MegaJoy builds a small arcade and the demand is high, then it expects revenues of $540. If MegaJoy builds a large arcade and the demand is low, then it has two alternatives: do nothing and earn revenue of $380, or reduce prices and earn revenues of $450. a. Draw a decision tree for this problem. b. Which choice yields the maximum expected money value?( Show calculation) c. A consulting firm has offered to perform reseach and forecast the demand fo MegaJoy. The firm will charge $8(thouthand) for its services, and it claims that the information will be 100% accurate. Should MegaJoy pay for the consulting services? Justify your…
Very Favorable Average Market Unfavorable Alternatives Market Market Build new plant $250,000 $180.000 - S200,000 Subcontract $270.000 $185,000 - $220,000 Overtime S100.000 $50,000 - $12.000 Do Nothing SO SO $0 a) Using the decision making under uncertainty with the criterion of Maximax The appropriate decision will be The value of the return under this decision is $ b) Using the decision making under uncertainty with the criterion of Maximin The appropriate decision will be The value of the return under this decision is $ c) Using the decision making under uncertainty with the criterion of Equally Likely The appropriate decision will be The value of the return under this decision is $ (enter your answer as a whole number).
3. The manager for a manufacturing company must recommend whether to construct a large plant, construct a small plant or do nothing. He estimates the long-run profits in $ as follows: State of Nature Alternative Good Average Poor Market($) Market ($) Market ($) Construct a 100,000 35,000 -60,000 large plant Construct a 75,000 25,000 -40,000 small plant Do nothing -5,000 0 0 Probability 25% 50% 25% Solve using: A. Expected Opportunity Loss B. Expected Value of Perfect Information
3. Solve the given question and give the correct answer.
PRACTICE PROBLEM 9.4 An aspirin manufacturer has agreed to sell its product to two drugstore chains at a per unit price of $10. At this price, the manufacturer earns $6 of profit on every unit sold. The inverse demand curve facing the two chains depends on the amount of retail ad- vertising. It is P= 40-(94) if there is no advertising, and P= 55-(9 + 42) if either firm mounts an advertising campaign. Such an advertising campaign costs $150. a. Will either chain engage in advertising under Cournot competition? Under Bertrand competition? b. Will the dealer wish to have the chains engage in advertising?
A retailer is deciding how many units of a certain product to stock. The historical probability distribution of sales for this product is 0 units, 0.2; 1 unit, 0.3; 2 units, 0.4, and 3 units, 0.1. The product costs $11 per unit and sells for $25 per unit. What is the conditional value for the decision alternative "Stock 3" and state of nature "Sell 1"?
* 00 T 35 R Miles used the information on the table to develop a Decision Tree for this situation and indicate which type of truck should he select. What would Miles's decision be based on Baye's Decision Rule? $16,000 3. $19,000 2 $21,000 $15,000 .5 Compact 000'0 000 $24,000 2. Full-size .2 000 0 Subcompact Can't be determined with the information provided Compact All of the answer choices are correct Full size MacBook Air 000 000 DD F7 F2 F3 F5 F8 F4 & $ 9. 7. 4. J K
Explain the factors to be considered to come up with probability of super event or unique event ?
11. Bakery Products is considering the introduction of a new line of pastries. In order to produce the new line, the bakery is considering either a major or a minor renovation of its current plant. Bill Wicker, head of operations, has developed the following conditional values table: Alternatives Favorable Market Unfavorable Market Major renovation $100,000 -$90,000Minor renovation $40,000 -$20,000 Do nothing $0 $0 Assume that the probability of a favorable market is equal to the probability of an unfavorable market.Part 2a) Choose the appropriate decision tree showing payoffs and probabilities.A.MinorFavorable40,000Unfavorable-20,000UnfavorableFavorableMajor100,000-90,000Do…

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