Question

An oil-drilling company knows that it costs $25,000 to sink a test well. If oil is hit, the income for the drilling company will be $415,000. If only natural gas is hit, the income will be $145,000. If nothing is hit, there will be no income. If the probability of hitting oil is 1/40 and if the probability of hitting gas is 1/20, what is the expectation for the drilling company?

Answer 1

x: 400,000 , 100,000, -25000
Matched probabilities are (1/40) , 1/20, 37/40

Expected profit = (1/40)*400,000 + (2/40)100,000 - (35/40)(25000)
E(x) = [400,000+200,000-875000)/40
E(x) = -$6875

Answer 2

Hmm...
I would think
expected profit (oil)=415000-25000=390000
expected profit (gas)=145000-25000=120000