Consider an oil-wildcatting problem. A decision maker has mineral rights on a pi
ID: 3236163 • Letter: C
Question
Consider an oil-wildcatting problem. A decision maker has mineral rights on a piece of land that may have oil underground. There is a 30% chance that the decision maker will strike oil if he drills. If he drills and strikes oil, then the net payoff is $180,000. If he drills and does not strike oil, then there will be a $10,000 loss due to the sunk cost. The alternative is not to drill at all, in which case the decision maker's net payoff is $0. Find the expected value of perfect information (EVPI).Explanation / Answer
The probability that the decision maker will strike oil is 30% and the net payoff is $180,000.
If he doesn't strike then the loss is $10,000
Thus EVPI = 0.3x180,000 + 0.7x(-10,000) = $47,000