Finance Mangerial

Topics: Bayes' theorem, Bayesian probability, Conditional probability Pages: 3 (522 words) Published: October 12, 2014
Sofia Yanez Malik
Homework6
1. What is a prior probability?
Prior probability is the  probability that is initially calculated based on the information or data that is available in that moment. 2. Explain the purpose behind using Bayes Theorem
The purpose of the Bayes' theorem is to revise previously calculated probabilities based on new information.

19.36
Again consider the oil company case that was described in Example 19.1. Recall that the oil company wishes to decide whether to drill and that the prior probabilities of no oil, some oil, and much oil are P(none)  .7, P(some)  .2, and P(much)  .1. Suppose that, instead of performing the seismic survey to obtain more information about the site, the oil company can perform a Cheaper magnetic experiment having two possible results: a high reading and a low reading. The past performance of the magnetic experiment can be summarized as follows: Magnetic State of Nature

Experiment Result None Some Much
Low reading .8 .4 .1 High reading .2 .6 .9 Here, for example, P(low  none)  .8 and P(high  some)  .6. Recalling that the payoffs associated with no oil, some oil, and much oil are $700,000, $500,000, and $2,000,000, Respectively , do the following:

a Draw a decision tree for this decision problem.
b Carry out a posterior analysis. Find the best alternative (drill or do not drill) for each possible result of the magnetic experiment(low or high) , and find the associate expected payoffs. c Carry out a preposterior analysis. Determine the maximum amount that should be paid for the magnetic experiment.

Bowerman, Bruce; O'Connell, Richard; Murphree, Emilly (2013-01-01). Business Statistics in Practice, 7th edition (Page 781). Business And Economics. Kindle Edition.

Bowerman, Bruce; O'Connell, Richard; Murphree, Emilly (2013-01-01). Business Statistics in Practice, 7th edition (Page...
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