SOLUTION: An oil-drilling company knows that it costs $25,000 to sink a test well. If oil is hit, the income for the drilling company will be $425,000. If only natural gas is hit, the income

Question 753909: An oil-drilling company knows that it costs $25,000 to sink a test well. If oil is hit, the income for the drilling company will be $425,000. If only natural gas is hit, the income will be $125,000. If nothing is hit, there will be no income. If the probability of hitting oil is 1/40 and if the probability of hitting gas is 1/20, what is the expectation for the drilling company?

Answer by fcabanski(1391) (Show Source): You can put this solution on YOUR website!
The chance of hitting oil is 1/40, gas 1/20, and nothing 1 - 1/40 - 1/20 = 1 - 1/40 - 2/40 = 40/40 - 3/40 = 37/40

Multiply each outcome by the probability of each:

1/40 * 425000 + 1/20 * 125000 - 37/40 * 25000 = 10625 + 6250 - 23125 = 16875 - 23125 = -6250.

The expectation is a loss of $6250.00.

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