A. ArmaCo must determine whether or not to drill for oil at theNorthern part of Jubail. It costs $100,000 to drill, and if oil isfound, the value is estimated to be $600,000. At present, ArmaCobelieves there is a 45% chance that the field contains oil with theprofit payoffs give in the table below. Alternatives State ofNature Oil Dry Drill 500 –100 No Drill 0 0 a. [0.5 Mark] Show thedecision tree for the situation. b. Which alternative should theArmaco choose using: i. [1 Mark] the optimistic approach ii. [1Mark] the conservative approach iii. [1 Mark] the minimax regretapproach. c. [1 Mark] Determine which alternative should be chosenbased on expected value. d. [1 Mark] Determine the expected valuewith perfect information. e. [1 Mark] Determine the expected valueof the perfect information. B. Before drilling, ArmaCo can hire(for $10,000) a geologist to obtain more information about thelikelihood that the field will contain oil. There is a 50% chancethat the geologist will issue a favorable report and a 50% chanceof an unfavorable report. Given a favorable report, there is an 80%chance that the field contains oil. Given an unfavorable report,there is a 10% chance that the field contains oil. f. [1 Mark] Showthe decision tree for the situation. g. [1 Mark] Determine ArmaCo’soptimal course of action. h. [0.5 Mark] How much is the expectedprofit? i. [1 Mark] Determine the Expected Value of SampleInformation.
