Question 235316: 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 bve $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 the probability of hitting gas is 1/20, what is the expectation for the drilling company? Should the company sink the test well.
Answer by stanbon(75887)   (Show Source):
You can put this solution on YOUR website! 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 the probability of hitting gas is 1/20, what is the expectation for the drilling company?
Should the company sink the test well.
------------
Let the random variable, x, represent company profit.
Values of "x": 400,000 , 100,000, -25000
Matched probabilities are (1/40) , 1/20, 37/40
----------------------------------------------------
Expected profit = (1/40)*400,000 + (2/40)100,000 - (35/40)(25000)
E(x) = [400,000+200,000-875000)/40
E(x) = -$6875
They can expect to lose that amount every time they drill.
================================================================
Cheers,
Stan H.
|
|
|
