Answer to Question #158823 in Statistics and Probability for Vincent.K. Miyato

Question

Oklahoma Oil company is considering to make a bid for shale oil development contract to be awarded by Government. The company has decided to bid for $2.2 billion. The company has estimated that it has a 60% of winning the contract with this bid. If the firm wins the contract, it can choose one of three methods for getting the oil from the shale: It can develop a new method for oil extraction; Use an existing (inefficient) process, or subcontract the processing out to a number of smaller companies once the shale has been extracted. The results from these alternatives are given below:

Outcomes Probability Profit ($'billion)

1 . Develop New Method

Great success 0.30 12.00

Moderate success 0.60 6.00

Failure 0.10 -2.00

2 . Use Existing Process

Great success 0.50 6.00

Moderate success 0.30 4.00

Failure 0.20 -0.80

3 . Subcontract

Moderate success 1.00 5.00

The cost of preparing the contract proposal is $0.04 billion. If the company does not make a bid, it will invest into an alternative venture with a guaranteed profit of $0.6 billion.

Required:

(a) Construct a sequential decision tree for this decision situation. (7 marks)

(b) Determine whether the company should make a bid. (7 marks)

(c) Write a report to management at Oklahoma Oil company explaining

(i) Value of perfect information (2 marks)

(ii) Any three decision criteria suitable in an uncertain environment (9 marks)

(Total: 25 marks)

Answer 1

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