Easy Money Oil Co. is considering drilling in Billy Bob\'s back yard or his fron
ID: 3126281 • Letter: E
Question
Easy Money Oil Co. is considering drilling in Billy Bob's back yard or his front yard. After thorough testing and analysis, they estimate that there is a 36% chance of striking oil in the back yard and a 48% chance in the front yard. They also estimate that the back yard site would either net $63 million (if oil is found) or lose $9 million (if oil is not found), and the front yard site would either net $57 million or lose $9 million. 1. What is the expected value of drilling in the back yard? $ equation editorEquation Editor (Make sure to write out the whole number.) 2. What is the expected value of drilling in the front yard? $ equation editorEquation Editor (Make sure to write out the whole number.) 3. Based on the expected values, where should they drill?
Explanation / Answer
as per the probability given
probability of striking oil at backyard = 0.36
probability of not striking oil at backyard = 0.64
probability of striking oil at front yard = 0.48
probability of not striking oil at front yard = 0.52
A)E(X) = X1*P(X1)+X2*P(X2)....+XN*P(XN)
= 0.36*63 +0.64*(-9) = 16.92
B) E(FRONT) = 0.48*57 +0.52*(-9) = 22.68
C) AS PER THE XPECTED VALUE THE VALUE AT FRONT IS HIGH THEN THE VALUE AT BACK THEREFORE THE DRILLING SHOULD BE AT FRONT YARD.