Question

An oil company is considering two sites on which to drill, described as follows:

Site A: Profit if it is found: $80 million
Site B: Profit if it is found: $120 million
Loss if no oil is found: $10 million
Loss if no oil is found: $18 million
Probability of finding oil: 0.2
Probability of finding oil: 0.1
Which site has a better expected value? A or B
What is the difference in the profits between the sites?

Answer 1

Site A: E = $80(.2) - $10(.8) = $16 - $8

= $8 million

Site B: E = $120(.1) - $18(.9) = $12 - $16.2

= -$4.2 million

Site A has a better expected value.

Difference in profits = $8 - (-$4.2)

= $12.2 million