solution

An oil company can purchase exploration rights in either of two blocks of the North Sea. If it acquires block Athere is a 0.4 probability of striking oil, which would give a profit of $14m. If it fails to strike oil, it can relocatethe rig within the block and drill once more when there would be an even chance of an oil strike with a netprofit of $12m. Failure to strike oil at the second attempt would mean a loss of $5m.Alternatively, having failed to strike oil first time the company could opt to cut its losses and lose $3m. If thecompany acquires block B there is an even chance of striking oil first time with a profit of $10m. If it has nosuccess, it can pull out (losing $3m) or relocate the rig once with a 0.7 chance of striking oil and an $8mprofit or a 0.3 chance of a dry well at the second attempt and an overall $5m loss.Which block should the company acquire?