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 $335,000. If only natural gas is hit, the income will be $165,000. 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?
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Should the company sink the test well?

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 $335,000. If only natural gas is hit, the income will be $165,000. 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?
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Should the company sink the test well?

anonymous · Answer

@dan815

anonymous · Answer

Okay, first suppose nothing is hit, what is the net result?
If oil is hit, what is the net result?
If gas is hit, what is the net result?

Can the company hit both?  What is the net result in that case?