го Don't Drill 5M d No Oil Drill O Drill No Oil -1.1M Hire Geolok favorable Don't Drill -0.1M Not favorable O Drill Na Oil -1.1M Don't Dr -0.1M a = M, b = M, C = M 9 = M, e= |M, f= M Σ
A big private oil company must decide whether to drill in the Gulf of Mexico. It costs $1 million (i.e., 1M) to drill, and if oil is found its value is estimated at $6 million. At present, the oil company believes that there is 45% chance that oil is present. Before drilling begins, the big private oil company can hire a geologist for $100,000 to obtain samples and test for oil. There is only about a 60% chance that the geologist will issue a favorable report. Given that the geologist does issue a favorable report, there is an 85% chance that there is oil. Given an unfavorable report, there is a 22% chance that there is oil. The following decision tree determine what the big private oil company should do. All the numbers are represented in a million unit.
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