Shamrock Oil has decided to rely on utility theory to assist in the decision concerning the oil field. The following table describes its utility function; all monetary values are in thousands of dollars:
(a) Redo Problem 37 using this information.
(b) How can you best describe Shamrock Oil’s attitude toward risk? Justify your answer.
Shamrock Oil owns a parcel of land that has the potential to be an underground oil field. It will cost $500,000 to drill for oil. If oil does exist on the land, Shamrock will realize a payoff of $4,000,000 (not including drilling costs). With current information, Shamrock estimates that there is a 0.2 probability that oil is present on the site. Shamrock also has the option of selling the land as is for $400,000, without further information about the likelihood of oil being present. A third option is to perform geological tests at the site, which would cost $100,000. There is a 30% chance that the test results will be positive, after which Shamrock can sell the land for $650,000 or drill the land, with a 0.65 probability that oil exists. If the test results are negative, Shamrock can sell the land for $50,000 or drill the land, with a 0.05 probability that oil exists. Using a decision tree, recommend a course of action for Shamrock Oil.