In Problem 41, suppose that the income for hitting oil is changed to ($ 825,000) and the
Question:
In Problem 41, suppose that the income for hitting oil is changed to \(\$ 825,000\) and the income for gas to \(\$ 225,000\). Now what is the expectation for the drilling company? Should the company sink the test well?
Data from problem 41
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? Should the company sink the test well?
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First lets recall what the concept of expectation means in probability The expectation of a random v...View the full answer
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