Question

Please fill answer in the table below. (Chapter 5q2)

An oil company purchased an option on land in Alaska. Preliminary geologic studies assigned the following prior probabilities.

P(high-quality oil)	=	0.35
P(medium-quality oil)	=	0.20
P(no oil)	=	0.45

If required, round your answers to two decimal places.

(a)

What is the probability of finding oil?

(b)

After 200 feet of drilling on the first well, a soil test is taken. The probabilities of finding the particular type of soil identified by the test are as follows.

P(soil | high-quality oil)	=	0.20
P(soil | medium-quality oil)	=	0.80
P(soil | no oil)	=	0.20

How should the firm interpret the soil test?

The probability of finding oil is good. Given the probability of finding good soil, the oil company is more likely to find - Select your answer -medium-qualityhigh-qualitynoItem 2  oil.

What are the revised probabilities?

Events	P(Ai)	P(S | Ai)		P(Ai ∩ S)		P(Ai | S)
High Quality (A1)
Medium Quality (A2)
No Oil (A3)
			P(S)=

What is the new probability of finding oil?

		Medium-Scale Expansion Profit			Large-Scale Expansion Profit
		x		f(x)	y		f(y)
Demand	Low	50		0.20	0		0.20
	Medium	150		0.10	100		0.10
	High	200		0.70	300		0.70

(a)

Compute the expected value for the profit associated with the two expansion alternatives. Round your answers to whole numbers, if needed.

	EV
Medium-Scale
Large-Scale

Which decision is preferred for the objective of maximizing the expected profit?

- Select your answer -Medium-ScaleLarge-ScaleItem 3

(b)

Compute the variance for the profit associated with the two expansion alternatives. Round your answers to whole numbers, if needed.

	Var
Medium-Scale
Large-Scale

Answer 1

a)P(finding oil)=0.35+0.2=0.55

b)There is a very likely chance of finding oil is they find oil below 200feet

There is a high chance of finding medium quality oil

Industries

E[Medium Scale]=50*0.2+150*0.1+200*0.7=165

E[Large Scale]=0*0.2+100*0.1+300*0.7=220

We need to choose large scale for maximising Profit

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