Oil Co. must determine whether or not to drill for oil in the South China...
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Oil Co. must determine whether or not to drill for oil in the South China Sea. It costs $200,000 to drill; and if the oil is found the value is estimated to be $1,000,000. At present, Oil Co. believes there is a 40% chance that the field contains oil. Before drilling, Oil Co. can hire (for $12,000) a geologist to obtain more information about the likelihood that the field will contain oil. From past data it is observed that the successful oil diggings had been correctly predicted by the geologist in 95% of the cases; and failed oil diggings were so predicted by the geologist in 90% of such cases. Determine Oil Co.s optimal course of action. Also determine EVSI and EVPI. (EVSI is the expected value of sample information or the information provided by the geologist; EVPI is the expected value of perfect information). Draw a decision tree model of the problem.
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