Purchase Solution

Decision tree

Not what you're looking for?

Ask Custom Question

1. The table below summarizes the payoffs you can expect to receive from investing in a limited partnership owning interests in an oil field. If the field is leased, you will receive the base lease amount plus royalties on any oil discoveries. If the field is drilled for oil, you will receive your share of the oil value. If no oil is discovered, you will have to cover the expenses of drilling. The payoffs are to you and they are in thousands of dollars.

The Discovery
Action Hit Oil No Oil
Drill $80 -$30
Lease $20 $10
Probability: .3 .7
(Payoffs in thousands of dollars)

a. If you are an expected-return maximizer, what action would you prefer? Show why.
b. If your basis for preferring an action is to minimize risk, which action would you prefer? Why?
c. Draw a picture of this decision tree, including the payoffs and probabilities.
d. Suppose that you could know if there is oil or not BEFORE you chose an action (drill or lease), but you don't have that information yet. Draw the tree diagram to represent this situation where you will learn the status of the land first and then decide to invest.
e. Does this new situation have a different expected value than the one evaluated in part (b) above? If so, what is the (dollar) difference? Which situation do you prefer?

See attached file for full problem description.

Attachments
Purchase this Solution
Solution Summary

The solution explains the scenarion with a well drawn decision tree. The solution also answers all the other questions below.

Purchase this Solution
Free BrainMass Quizzes
Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

View More Free Quizzes
Related BrainMass Solutions

  • Decision Analysis : Benefits of a Decision Tree Plan that Displays Decision Alternatives

    133203 Decision Analysis : Benefits of a Decision Tree Plan that Displays Decision Alternatives In your own words, what are the benefits of a decision tree plan that displays decision alternatives?

  • Explain the parts of a decision tree and benefits for using it

    347602 Explain the parts of a decision tree and benefits for using it Explain the parts of a decision tree. What are some benefits of using decision trees? In what ways can decision trees be used for business decisions?

  • How to create a decision tree

    This solution shows how to create a decision tree.

  • Decision Analysis for Production with Uncertain Demand

    Describe a decision tree and tell me how a tool such as this can be utilized to improve decision making. Problem: Describe a decision tree and tell me how a tool such as this can be utilized to improve decision making.

  • Decision Tree

    242873 Contingency plan by using a decision tree Create a contingency plan by using a decision tree. The contingency plan will focus on Raising money for charity for a wildlife sanctuary.

  • decision tree

    Describe a decision tree and discuss how such a tool can be utilized to improve decision making.

  • Calculating expected payoff for a decision tree

    81075 Decison tree: Expected payoff What is the expected value for the follwoing decision tree? Graph is attached A 84.5 B 70 C 100 D -50 Hi The attached excel file contains calculations of Expected payoffs for given decision tree.

  • Vroom-Yetton-Jago Decision tree

    580985 Vroom-Yetton-Jago Decision Tree The Vroom-Yetton-Jago Decision Tree is a powerful tool for analyzing the characteristics of a decision situation. However, it does have limitations. What are the strengths and weakness of the VYJ Tree?

  • Draw a decision tree and solve the problem

    Draw a decision tree to represent the problem. Solve the problem by rolling back the decision tree. See the attached file. The solution draws a decision tree and solves a problem between two gambles.

  • Decision tree Problem

    Failure costs $50k Build tree and solve I need assistance with building a decision tree.

View More Related Solutions