(A) Construct a Decision Tree to Help the Power Company

question 89

Essay

(A) Construct a decision tree to help the power company decide what to do. Make sure to label all decision and chance nodes and include appropriate costs, payoffs and probabilities.
(B) Where should the power company build the plant? What is the expected cost?
(C) Suppose that a geologist (and his team) can be hired to analyze the fault structure at Chico Canyon. He will either predict whether an earthquake will occur or not. If the geologist is perfectly reliable, what is the most the company should be willing to pay for his services?
(D) Suppose that an actual (not perfectly reliable) geologist can be hired to analyze the earthquake risk. The geologist's past record indicates that he will predict an earthquake on 90% of the occasions for which an earthquake will occur and no earthquake on 85% of the occasions for which an earthquake will not occur. Given this information, what are the posterior probabilities that an earthquake will and will not occur, given the geologists predictions?
(E) Should the company hire the geologist if his fee is $1.5M?

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Definitions:

Socioeconomic Character

Refers to the social and economic attributes that define the status or characteristics of individuals or groups within a society.

Duty of Loyalty

A legal obligation of fiduciaries, such as company directors and trustees, to act in the best interest of the entity or person they represent.

Actual Financial Loss

A monetary loss that can be quantified or accurately measured, resulting from specific events like theft or litigation.

Negligent

Describes a failure to exercise the care that a reasonably prudent person would exercise in like circumstances, leading to unintended damage or harm.