The senior executives of an oil company are trying to decide whether to drill for oil...

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General Management

The senior executives of an oil company are trying todecide whether to drill for oil in a particular field in the Gulfof Mexico. It costs the company $300,000 to drill in the selectedfield. Company executives believe that if oil is found in thisfield its estimated value will be $1,800,000. At present, this oilcompany believes that there is a 48% chance that the selected fieldactually contains oil. Before drilling, the company can hire ageologist at a cost of $30,000 to prepare a report that contains arecommendation regarding drilling in the selected field. There is a55% chance that the geologist will issue a favorable recommendationand a 45% chance that the geologist will issue an unfavorablerecommendation. Given a favorable recommendation from thegeologist, there is a 75% chance that the field actually containsoil. Given an unfavorable recommendation from geologist, there is a15% chance that the field actually contains oil.
1. Assuming that this oil company wishes to maximize itsexpected net earnings, determine its optimal strategy through theuse of a decision tree.

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4.4 Ratings (622 Votes)

The company can choose to hire a geologist or not hire ageologistIf the company does not hire a geologist and goes aboutdrilling there is a 52 chance it will not get oil and lose the300000 or there is 48 chance it will gain net 15000001800000 See Answer

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