Nuclear

 Power  Plants  and  Earthquakes  

 
SRP  is  deciding  whether  to  build  a  nuclear  power  plant  at  Sun  Devil  Canyon  or  at  
Brewer  city.    The  cost  of  building  the  power  plant  is  $10  Million  at  Sun  Devil  Canyon  
and  $20  Million  at  Brewer  City.    If  the  company  builds  at  Sun  Devil,  however,  and  an  
earthquake  occurs  at  Sun  Devil  during  the  next  five  years,  construction  will  be  
terminated  and  the  company  will  be  out  the  full  $10  Million  construction  cost  (and  
will  still  have  to  build  a  power  plant  at  Brewer  City).      
 
Without  further  expert  information  the  company  believes  there  is  a  20%  chance  
that  an  earthquake  will  occur  at  Sun  Devil  during  the  next  five  years  (it’s  a  
surprisingly  unstable  geologic  region).      
 
For  $1  Million,  a  geologist  can  be  hired  to  analyze  the  fault  structure  at  Sun  Devil  
Canyon.    She  will  predict  either  that  an  earthquake  will  occur  or  that  an  earthquake  
will  not  occur.    The  geologist’s  past  record  indicates  that  she  will  predict  
“earthquake”  on  95%  of  the  occasions  for  which  an  earthquake  will  occur  but  will  
also  predict  “earthquake”  on  10%  of  the  occasions  for  which  an  earthquake  will  not  
occur.      
 
What  is  the  optimal  decision  for  SRP?      
What  is  the  most  that  SRP  should  consider  paying  the  geologist  for  her  prediction?    
What  is  the  most  SRP  would  pay  to  any  geologist  for  a  prediction?