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decision models an oil company has some land that is reported to possibly contain oi 3759516

Decision Models. An oil company has some land that is reported to possibly contain oil. The company classifies such land into four categories by the total number of barrels that are expected to be obtained from the well, i.e. a 500,000 – barrel well, 200,000 – barrel well, 50,000 – barrel well, and a dry well. The company is faced with deciding whether to drill for oil, to unconditionally lease the land or to conditionally lease the land at a rate depending upon oil strike. With considerations of the cost of drilling the well and the (un)conditional lease agreement, the pay-off table is given below:

In case of making decisions under risk, the probability for striking a 500,000 – barrel well is 0.2, probability for striking a 200,000 – barrel well is 0.3, probability for striking a 50,000 – barrel well is 0.1, and probability for a dry well is 0.4.

Payoff Table

States of Nature







500K Barrel Well

200K Barrel Well

50K Barrel Well

Dry Well

1. Drilling





2. Unconditional Lease





3. Conditional Lease





(a) Determine the optimal action based on the Maximin criterion. (3 pts)

(b) Compute the expected monetary value (EMV) for each decision. (3 pts)

(c) Compute the expected value of perfect information (EVPI) and explain the meaning of it in this problem. (4 pts)

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