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 $425,000. If only natural gas is hit, the income will be $150,000. 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

Set up a tree!

All 3: -25000 for drilling

What's the rest?

I am a little puzzled with the language of the problem statement. Can we hit Gas AND Oil? If so, are those probabilities Independent? There may be more interest to this problem.