An oil company purchased an option on land in Alaska. Preliminary geologic studi

Question

An oil company purchased an option on land in Alaska. Preliminary geologic studies assigned the following prior probabilities.
P(high-quality oil) = 0.5
P(medium-quality oil) = 0.2
P(no oil) = 0.3

a. After 200 feet of drilling on the first well, a soil test is taken. The probabilities of finding the particular type of soil identified by the test follow.
P(soil I high-quality oil) = 0.2
P(soil I medium-quality oil) = 0.8
P(soil I no oil) = 0.2
How should the firm interpret the soil test?
What are the revised probabilities, and what is the new probability of finding oil?

Explanation / Answer

P(soil) =0.5 x 0.2 + 0.2 x 0.8 +0.3x0.2= 0.32

P(high soil /soil) =0.5 x 0.2 / 0.32 =0.3125

P(medium /soil) =0.8 x 0.2 / 0.32 =0.875

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---