Question

A multinational oil company is considering setting up a subsidiary in Grenada. They realize that the success depends in part on the ensuing political climate in Grenada. Management estimates the probability of success (in terms of resulting revenues from the subsidiary during its first year of operation) is 0.55 if the prevailing political condition is favorable, 0.30 if the political condition is neutral, and 0.10 if the prevailing political condition is unfavorable. They further estimate the probabilities of favorable, neutral and unfavorable as 0.6,0.2 and 0.2 respectively. What is the probability of success of the new subsidiary?

Answer 1

The probability of success for the new subsidiary in Grenada, considering the probabilities of different political conditions, is calculated to be 41%.

Step-by-step explanation:

To calculate the probability of success of the multinational oil company’s new subsidiary based on the given conditions in Grenada, we can use the law of total probability. This involves combining the probabilities of success under different political conditions with the probabilities of those political conditions themselves. Here’s the step-by-step calculation:

• Multiply the probability of success given a favorable condition by the probability of a favorable condition: 0.55 (success) × 0.6 (favorable).
• Multiply the probability of success given a neutral condition by the probability of a neutral condition: 0.30 (success) × 0.2 (neutral).
• Multiply the probability of success given an unfavorable condition by the probability of an unfavorable condition: 0.10 (success) × 0.2 (unfavorable).
• Sum all these products to get the total probability of success.

Therefore:

Probability of success = (0.55 × 0.6) + (0.30 × 0.2) + (0.10 × 0.2)

= 0.33 + 0.06 + 0.02

= 0.41 or 41%