Question

after carefully testing finite

Decision analysis. After careful testing and analysis, an oil company is considering drilling in two different sites. It is estimated that site A will net $30 million i successful (probability and lose $2 million if not (probability.7): site will net $70 nillion if successful (probability 2) and lose $6 million if not (probability.8). Which site should the company choose accordi to the expected return from each site? a. What is the expected return for site A7$ million b. What is the expected return for site B? $| milion c. Which site should the company choose? Site A Site B

Answer 1

E(X) = $\sum$ x. P(X=x)

Hence,

A.

Expected return for site A

= net amount from site A * probability that site A will net that amount

+ lost amount from site A * probability that amount will lose at site A

= 30 million * 0.3 + (- 2 million) * 0.7

= 7.6 million

B.

Expected return for site B

= net amount from site B * probability that site B will net that amount

+ lost amount from site B * probability that amount will lose at site B

= 70 million * 0.2 + (- 6 million) * 0.8

= 9.2 million

C.

Option 2 : Site B

Since the expected return from site B is greater than that from site A.