Oilco must determine whether or not to drill for oil in the South China Sea. It costs $100,000, andif oil is found, the value is estimated to be $600,000. At present, Oilco believes there is a 45%chance that the field contains oil. Before drilling, Oilco can hire (for $10,000) a geologist to obtainmore information about the likelihood that the field will contain oil. There is a 50% chance that thegeologist will issue a favorable report and a 50% chance of an unfavorable report. Given afavorable report, there is an 80% chance that the field contains oil. Given an unfavorable report,there is a 10% chance that the field contains oil. Determine Oilco's optimal course of action. Alsodetermine EVSI and EVPI.

The rise in anticipated value owing to obtaining additional knowledge about an unknown quantity is…

Answered: Oilco must determine whether or not to…

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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If the farmer uses pesticides he expects a crop of 60,000 bushels; if he does not use pesticides he expects a crop of 55,000 bushels. The cost of pesticides is $20,000 and the other costs associated with planting and harvesting the crop total $450,000. The price of corn at harvest time will either be $10.00 with probability of 0.50 or it will be $12.00 with probability 0.50, so if the farmer decides to sell the crop at harvest, the expected price per bushel that he will receive is $11.00. What will be his total production cost if he uses pesticides? a. $430,000.00 b. $470,000.00 c. $450,000.00 d. $660,000.00
Emma can either buy a used car or buy a new car. The used car costs $12,800 with a 40% chance she will run into mechanical problems that will cost $3500 to repair. The new car costs $17,595. Also, there is an 8% chance she will get into an accident in the next 5 years, which will cost 20% of the value of her car. If the cost of the accident is greater than $5000 she would only pay a deductible of $3000. What is the expected value of buying a new car? What is the expected value of buying a used car? Draw a probability tree.
You are attempting to establish the utility that your boss assigns to a payoff of $1,200. You have established that the utility for a payoff of $0 is zero and the utility for a payoff of $10,000 is one. Your boss has just told you that they would be indifferent between a payoff of $1,200 and a lottery which has a payoff of $10,000 where the probability of losing is 0.9. What is your boss' utility for $1,200? (Round your answer to 1 decimal place.) Utility of $1,200
At the beginning of each day, a patient in the hospital is classifed into one of the three conditions: good, fair or critical. At the beginning of the next day, the patient will either still be in the hospital and be in good, fair or critical condition or will be discharged in one of three conditions: improved, unimproved, or dead. The transistion probabilities for this situation are Good Fair Critical Good 0.65 0.20 0.05 Fair 0.50 0.30 0.12 Critical 0.51 0.25 0.20 Improved Unimproved Dead Good 0.06 0.03 0.01 Fair 0.03 0.02 0.03 Critical 0.01 0.01 0.02 For example a patient who begins the day in fair condition has a 12% chance of being in critical condition the next day and a 3%…
A company is considering whether to market a new product. Assume, for simplicity, that if this product is marketed, there are only two possible outcomes: success or failure. The company assesses that the probabilities of these two outcomes are p and 1 - p, respectively. If the product is marketed and it proves to be a failure, the company will have a net loss of $450,000. If the product is marketed and it proves to be a success, the company will have a net gain of $660,000. If the company decides not to market the product, there is no gain or loss. The company can first survey prospective buyers of this new product. The results of the consumer survey can be classified as favorable, neutral, or unfavorable. Based on similar surveys for previous products, the company assesses the probabilities of favorable, neutral, and unfavorable survey results to be 0.6, 0.3, and 0.1 for a product that will eventually be a success, and it assesses these probabilities to be 0.1, 0.2, and 0.7 for a…
At Tech Innovators Corporation, a study was conducted to assess employees' job satisfaction and their engagement in professional development activities. Out of the 500 employees surveyed: 220 employees reported being satisfied with their jobs. 350 employees were engaged in some form of professional development. 180 employees were both satisfied with their jobs and engaged in professional development. What is the probability that a randomly selected employee from the company is satisfied with their job? Given that an employee is engaged in professional development, what is the probability that they are also satisfied with their job? What is the probability that an employee who is not engaged in professional development is satisfied with their job?
A car insurance company divide their policy holders into two categories: more-risky and less-risky drivers. The more-risky drivers account for 25% of the total number of drivers insured by the company. The probabilities that a more-risky and a less-risky driver will file a claim within a year are 0.36 and 0.08, respectively. Answer the following questions: 1. What is the probability that any one of the company’s policy holders will file the claim within a given year?
A recent 10-year study conducted by a research team at the Great Falls Medical School was conducted to assess how age, systolic blood pressure, and smoking relate to the risk of strokes. Assume that the following data are from a portion of this study. Risk is interpreted as the probability (times 100) that the patient will have a stroke over the next 10-year period. For the smoking variable, define a dummy variable with 1 indicating a smoker and 0 indicating a nonsmoker. The data is provided below: Risk of Strokes Age Systolic Blood Pressure Smoker 10 59 156 0 25 65 163 0 12 60 158 0 57 86 177 1 28 59 196 0 50 76 189 1 17 57 159 1 34 78 120 1 37 80 135 1 15 78 98 0 22 71 152 1 39 70 173 1 17 67 135 0 48 77 209 1 18 60 199 0 36 82 119 1 10 66 166 0 34 80 125 1 4 62 117 0 38 59…
How would I calculate the expected values for probabilities that aren't a single value such as 1-4% and >4%?
The University of Miami bookstore stocks textbooks in preparation for sales each semester. It normally relies on departmental forecasts and preregistration records to determine how many copies of a text are needed. Preregistration shows 85 operations management students enrolled, but bookstore manager Vaidy Jayaraman has second thoughts, based on his intuition and some historical evidence. Vaidy believes that the distribution of sales may range from 65 to 85 units, according to the following probability model: Demand Probability 65 0.05 Stock 65 70 75 80 85 70 0.25 This textbook costs the bookstore $82 and sells for $107. Any unsold copies can be returned to the publisher, less a restocking fee and shipping, for a net refund of $30. a) Based on the given information, Vaidy's conditional profits table for the bookstore is: Demand 75 P=0.30 65 P = 0.05 0000 70 P = 0.25 75 0.30 ☐☐☐☐ 80 0.15 00000 80 85 P = 0.15 P = 0.25 30000 85 0.25 ☐☐☐☐
A farmer must decide whether to take protective action to limit damage to his grapefruit crop in the event that the overnight temperature falls to a level well below freezing. If the temperature drops too low he runs the risk of losing his entire crop, valued at $75,000. Based on the National Weather Service, the probability of such a temperature drop is 60%. He can insulate his crop by spraying water on all the trees, which will cost $20,000. This action might succeed in protecting the crop, with the following possible outcomes: Probability Damage 0.30 $0 0.15 $5,000 0.10 $10,000 0.15 $15,000 0.30 $20,000 Construct a decision tree to help the farmer make his decision. What should he do? Explain your answer. Find the highest cost of insulating the grapefruits for which the farmer prefers to insulate his crop. Suppose the farmer is uncertain about the reliability of the National Weather Service forecast. If he thinks the probability of…
Senior executives at an oil company are trying to decide whether to drill for oil in a particular field. It costs the company $750,000 to drill. The company estimates that if oil is found the estimated value will be $3,650,000. At present, the company believes that there is a 48% chance that the field actually contains oil. Before drilling, the company can hire an expert at a cost of $75,000 to perform tests to make a prediction of whether oil is present. Based on a similar test, the probability that the test will predict oil on the field is 0.55. The probability of actually finding oil when oil was predicted is 0.85. The probability of actually finding oil when no oil was predicted is 0.2. What is the EMV if the company hires the expert?

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