Question

An oil magnate can buy a piece of land for $900,000. She believes that there is a .5 probability of no oil, a .3 chance of one well, and a .2 chance of two wells. She will make $1,000,000 for each well on the land. Before she makes a decision she runs an experiment that costs $100,000. From this experiment she observes x = 1 where x is a binary statistical variable x ∈ {0, 1} such that P{x = 1|no oil} = 0, P{x = 1|one well} = .4, P{x = 1|two wells} = .7. What should she do?

(A) Buy. Expect to make $538,461

(B) Buy. Expect to make $638,461

(C) Don’t buy. Expect to loose $438,461

(D) Buy. Expect to make $738,461

(E) Run another experiment

Answer 1