Question

An oil-drilling company knows that it costs $28,000 to sink a test well. If oil is hit, the income for the drilling company will be $445,000. 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 $$ \dfrac{1}{40} $$ and if the probability of hitting gas is $$ \dfrac{1}{20} $$, what is the expectation for the drilling company?

Answer 1

Expected income is ∑ x P(x).
you have three cases where
x1=445000, P(x1)=1/40
x2=145000, P(x2)=1/20
x3=0, P(x3)=1-1/40-1/20=37/40
Calculate the sum and don't forget to subtract the fixed cost from the expected income.