An oil company purchased an option on land in Alaska. Preliminary geologic studi
ID: 3041038 • Letter: A
Question
An oil company purchased an option on land in Alaska. Preliminary geologic studies assigned the following prior probabilities.
P(high quality oil) = 0.45
P(medium quality oil) = 0.25
P(no oil) = 0.30
What is the probability of finding oil? If required, round your answer to two decimal places.
After 200 feet of drilling on the first well, a soil test is made. The probabilities of finding the particular type of soil identified by the test are P(soil | high quality oil) = 0.15, P(soil | medium quality oil) = 0.80, P(soil | no oil) = 0.35
How should the firm interpret the soil test?
What are the revised probabilities, and what is the new probability of finding oil? If required, round your answer to two decimal places.
P(Oil) =
Explanation / Answer
1. P(finding oil) = 1-P(finding no oil) = 1-.30 = .70
2. The best interpretation of the soil test is that based on oil content a certain outcome of soil test presides.
A P( soil|medum quality oil) = .80 means that given that there is medium quality oil beneath then the probability of getting a particular type of soil is very high i.e. 80
The opposite is the case with high quality soil results.
3.
The revised probabities are that given that the soil test has been made what are probabilities of getting a quality of oil
The new probabiliteis of finding oil are:
Probability weighted value of prioir probabilities with those identified by soil i.e. :
P(Oil)
= P(soil | high quality oil)*P(high quality oil)+ P(soil | medium quality oil)*P(medium quality oil)+ P(soil | no oil)*P(no oil)
= .45*.15 + .25*.80 + .3*.35
= .37