Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land.If he drills a well and does not strike oil, his net loss will be $50,000, but if he drills a well and strikes oil, his net gain will be $100,000.If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $1000.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 revolves around the decision of whether to drill the well or not, making "drill the well" a decision alternative. The payoffs and states of nature are the outcomes that result from choosing the decision alternative. The revised probabilities and prior probabilities are not relevant in this scenario. Since the expected value of drilling the well is higher than not drilling it, the best choice is to drill the well.

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