SOLUTION: Solve the problem. A mining company is considering two sites on which to dig, described as follows: Site A: Profit if diamonds are found: $80 million. Loss if no diamonds

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Question 885455: Solve the problem.
A mining company is considering two sites on which to dig, described as follows:
Site A: Profit if diamonds are found: $80 million.
Loss if no diamonds are found: $15 million.
Probability of finding diamonds: 0.2
Site B: Profit if diamonds are found $100 million.
Loss if no diamonds are found $16 million.
Probability of finding diamonds: 0.1
Answer by DrBeeee(684) About Me  (Show Source):
You can put this solution on YOUR website!
The expected return is given by
(1) E(return) = Prob(return)*Amount of return, and the expected gain is the expected return minus the cost.
At site A we get
(2) E(return at A) = 0.2*80 mil or
(3) E(return at A) = 16 mil
(4) E(gain at A) = 16 - 15 or
(5) E(gain at A) = 1 mil
At site B we get
(2) E(return at B) = 0.1*100 mil or
(3) E(return at B) = 10 mil
(4) E(gain at B) = 10 - 16 or
(5) E(gain at B) = -6 mil
CLearly you would dig at site A.