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Decision tree

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Decision tree

  • This topic has 1 reply, 2 voices, and was last updated 6 years ago by John Moffat.
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  • Author
    Posts
  • July 29, 2018 at 9:27 am #465111
    rihaam
    Member
    • Topics: 53
    • Replies: 37
    • ☆☆

    (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?

    July 29, 2018 at 11:12 am #465126
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    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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