Smith will earn a profit of $300 next year if an oil pipeline is built in Nebraska or $100 if it is not built. Jones will earn $40 if the pipeline is built or $165 if it is not built. The probability that the pipeline is built is 0.2 and the probability that it is not built is 0.8.

a. Find the expected value of Smith’s profit and the expected value of Jones’s profit.

b. Smith and Jones are considering forming a partnership and dividing the total profits evenly. Find the expected value of each person’s profits.

c. What is the benefit of forming a partnership to Smith and Jones? (Hint: How has the risk of their payoffs changed?)