An oil company, after careful testing and analysis, is considering drilling in two different sites. It is estimated that site A will net $30 million if successful (probability of .2) and lose $3 million if not; site B will net $70 million if successful (probability of .11) and lose $4 million if not.
2006-12-08 17:00:31 · 4 answers · asked by HistoryHelp471 1 in Science & Mathematics ➔ Mathematics
Site B should be chosen. If the company does not choose site B, they are not entrepreneurial enough to be in business. Business is all about informed gambling. I assume that the start up and operating costs for both sites are the same?
2006-12-08 17:16:46 · answer #1 · answered by LaineeTheCat 2 · 0⤊ 0⤋
Depends on the risk the management wants to take. If it is conservative, site A is better option as the chance of hitting oil is 20%.
2006-12-08 17:11:33 · answer #2 · answered by George L 1 · 0⤊ 0⤋
expected value of site A = 30(0.2) - 3(0.8) = 3.6 million
expected value of site B = 70(.11) - 4(.89) = 4.14 million
site B
2006-12-08 17:07:02 · answer #3 · answered by socialistmath 2 · 2⤊ 0⤋
You want to compare expected values:
General equation:
E($) = p(gain)*gain + p(lose)*loss
(where loss is negative)
A. E($) = 0.2*30mill - 0.8*3 mill = 6.0-2.4 = 3.6 million
B. E($) = 0.11*70 mill - 0.88*4 = 7.70 - 3.52 = 4.18 million
Plan B has a greater expectation.
2006-12-08 17:11:37 · answer #4 · answered by modulo_function 7 · 1⤊ 0⤋