Question

Oil producers face many challenges, including large fluctuations in the price of oil and the uncertainty of actually finding oil during a particular exploration. An oil producer is considering drilling in a certain location. Its advisory board estimates that it will lose $40,000 if no oil is found, will make a profit $12,000 if an average amount of oil is found, and will make a profit $69,000 if a lot of oil is found. Geologists estimate the probability of not finding any oil in this location is 0.12 , the probability of finding an average amount of is 0.56 , and the of finding a lot of oil is 0.32 . What is the expected profit of drilling in this location?

Answer 1

The expected profit of drilling in this location is $24,000.

Step-by-step explanation:

To find the expected profit of drilling in this location, we need to multiply each profit amount by their respective probabilities and then sum them up.

The expected profit can be calculated as follows:

1. Multiply the profit of $12,000 by the probability of finding an average amount of oil (0.56) = $6,720
2. Multiply the profit of $69,000 by the probability of finding a lot of oil (0.32) = $22,080
3. Multiply the loss of $40,000 by the probability of not finding any oil (0.12) = -$4,800
4. Sum up the results: $6,720 + $22,080 - $4,800 = $24,000

Therefore, the expected profit of drilling in this location is $24,000.