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 $395,000. If only natural gas is hit, the income will be $125,000. 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? My answer is $16,800 and it is wrong where did I go wrong

Answer 1

expected value of drilling:
-25000+395000*1/20 + 125000*1/40
which is a loss on drilling holes.

Answer 2

p(oil) = 1/40
p(gas) = 1/20
p(oil and gas) = 1/800

so
(1/40)(395,000) = 9875
(1/20)(125,000) = 6250
(1/800)(520000) = 650
So I get 16,775 income - 25,000 expense = -8225
They expect to lose money I think.

Answer 3

Thank you to both of you. I see where I went wrong. Thanks again your time to me is very appreciated

Answer 4

You are welcome.