The Mobile Oil company has recently required oil rights to a new potential scource of natural oil in Alaksa. The current market value of these rights is $90,000. If there is natural oil at the site, it is estimated to be worth $800,000; however, the company would have to pay $100,000 in drilling costs to extract the oil. The company believes there is a .25 probability that the proposed drilling site is actually would hit the natual oil reserve. Alternatively, the company can pay $30,000 to first carry out a seismic survey at the proposed drilling site. The probability of a favorable seismic survey when oil is present at the drilling site is 0.6. The probability of an unfavorable seismic survey when no oil is present is 0.80.
a. What is the probability of a favorabale seismic survey?
b. What is the probability of an unfavorable survey?
c. Construct a decision tree for this problem
d. What is the optimal decision strategy using the EMV criterion?
e. To which financial estimate in the decision tree is the EMV most sensitive?