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(a) You have the mineral rights to a piece of land that you believe may
have oil underground. There is only a 10% chance that you will strike
oil if you drill, but the profit is $200,000.
It costs $10,000 to drill. The alternative is not to drill at all, in which
case your profit is zero.
Should you drill? Draw a decision tree to represent your problem.(b) Before you drill, you may consult a geologist who can assess the
promise of the piece of land. She can tell you whether the prospects
are good or poor, but she is not a perfect predictor. If there is oil, the
probability that she will say there are good prospects is 95%. If there
is no oil, the probability that she will say prospects are poor is 85%.Draw a decision tree and calculate the value of imperfect information
for this geologist. If the geologist charges $7,000, would you use her services?For(b)
My decision tree started from oil being present and not present after which there would be two outcomes for each ie the geologist saying prospects good or bad.
So finally there would be four outcomes.The answer given starts from the probability of geologist saying prospects are good or bad.And then the oil being present and not present.
My final answer doesnt match with the answer given.
Can you please point out the mistake in my approach?As I explain in my lectures on this, you cannot now be expected to draw a decision tree in the exam (although you can be tested that you understand decision trees).
The answer to part (b) must start with the results from the geologist, because what she says will affect the decision about whether or not to drill.
Have you watched my free lectures on decision trees, because I work through a similar example and explain it.
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