Answer to Question #348375 in Statistics and Probability for Rugo

Question

           Oil                             0.2

           No oil                         0.8

 

It is possible for Shell ltd to hire a firm of international consultants to carry out a complete survey of the site. Shell ltd has used the firm many times before and has made the following estimates:

 

1.     If there really is oil, then there is a 95% chance that the report will be favourable.

2.     If there is no oil then there is only a 10% chance that the report will indicate that there is oil.

 

The following additional information is also provided:

·        The cost of drilling is Sh.10 million.

·        The value of the benefits if oil is found is Sh.70 million

·        The cost of obtaining information is Sh.3 million.

 

Required:

a)     Advise the company on whether to acquire additional information from the consultants                                                                            (16 marks)

b)     Compute the value of imperfect information.                        (4 marks)

Answer 1

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