Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land.If he drills a well and does not strike oil his net loss will be $500,000, but if he drills a well and strikes oil his net gain will be $1,000,000.If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $10,000.For Dan's decision problem, the variable "drill the well" is one of the ___.
A)payoffs
B)decision alternatives
C)states of nature
D)revised probabilities
E)prior probabilities

Question

Quizplus · Accepted Answer

The decision problem presented is whether Dan should drill a well or not. Therefore, the variable "drill the well" is one of the decision alternatives. The best choice will depend on the probabilities of striking oil or not, but without that information, the best decision would be to drill the well, as the potential net gain of $1,000,000 is greater than the potential net loss of $500,000.

Dan Hein Owns the Mineral and Drilling Rights to a 1,000