An oil company is considering two sites on which to dril, described as follows:

Question

An oil company is considering two sites on which to dril, described as follows: Site A: Profit if oil is found: $100 million Site B: Profit if oil is found: $150 million Loss if no oil is found: $15 million Probability of finding oil: 0.2 Loss if no oil is found: $27 million Probability of finding oil: 0.1 a. Which site has the larger expected profit? O Site A has the larger expected profit O Site B has the larger expected profit O The expected profits for both sites are the same. b. If the expected profit for both sites is not the same, by how much is the expected profit larger? Smillion (Round to the nearest tenth as needed)

Explanation / Answer

Site A:

p=probability of finding oil= 0.2

Profit if oil is found=100 mill $

q=probability of not finding oil= 0.8

Loss if oil is not found=15 mill $

Expected payoff = 0.2*100 - 0.8*15 = 20-12= 8 mill $

Site B:

p=probability of finding oil= 0.1

Profit if oil is found=150 mill $

q=probability of not finding oil= 0.9

Loss if oil is not found=27 mill $

Expected payoff = 0.1*150 - 0.9*27 = 15 - 24.3 = -9.3 mill $

a) Site A has larger expected profit

b) The expected profit for Site A is larger by 8+9.3 = 17.3 mill $

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