Question

An oil-drilling company knows that it costs $65,000 to sink a test well. If oil is hit, the income for the drilling company will be $550,000. If only natural gas is hit, the income will be $428,373. If nothing is hit, there will be no income. If the probability of hitting oil is 1/65 and if the probability of hitting gas is 1/35, what is the expectation for the drilling company? Should the company sink the test well?

Answer 1

Answer: The expectation for the drilling company is $20700.76.

No, the company should not sink the test well as the cost for sinking is $65000 and our expectation is just $20700.76.

Explanation:

Since we have given that

Probability of hitting oil =
`(1)/(65)`

Probability of hitting oil =
`(1)/(35)`

Income for the drilling company = $550,000

Income for the natural gas = $428,373

According to question, we get that

Expected for the drilling company would be :

`(1)/(65)* 550000+(1)/(35)* 428,373\\\\=\$20700.76`

No, the company should not sink the test well as the cost for sinking is $65000 and our expectation is just $20700.76.