Instead of the seismic sounding, Joe could pay a geologic consultant for a field
ID: 388040 • Letter: I
Question
Instead of the seismic sounding, Joe could pay a geologic consultant for a field inspection that will yield information about the subsurface structure. The con- sultant gives Joe the following information about the accuracy of his inspection: if the subsurface structure is truly type A, then there is a 85% probability that the inspection will indicate that subsurface structure is type A; if the subsurface structure is truly type B, then there is a 50% probability that the inspection will indicate that subsurface structure is type B. Joe is risk neutral in this situation. Joe can get the results of the inspection in time to review them before making the drilling decision. What is the expected value of the imperfect information generated by the field inspection?Explanation / Answer
Assuming that there are only 2 types of surfaces type A and type B. The probability of each selection is 50%
Therfore the expected value of imperfect information selection = probability of their selection * probability of incorrect inspection selection
=0.5*(1-0.85) + 0.5*(1-0.5)
= 0.5*0.15 + 0.5*0.5
= 0.325
i.e at 32.5% times there is a chance that the field inspection may go wrong
I tried to answer in a simple and crisp way, do let me know if you have any questions