Question 756383: 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 $395,000. If only natural gas is hit, the income will be $130,000. 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 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 $395,000. If only natural gas is hit, the income will be $130,000. 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?
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Random "gain" values in thousands:.....-25........395........130
Corresponding probabilities:::::::.....(37/40)....(1/40......(2/40)
E(gain) = [37*-25 + 395 + 2*130]/40 = -270 thousand dollars
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Cheers,
Stan H.
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