Q5. An oil well company is bidding for the rights to drill a well in field A and

Question

Q5. An oil well company is bidding for the rights to drill a well in field A and a well in field B. The probability it will drill a well in field A is 40%. If it does, the probability the well will be successful is 45%. The probability it will drill a well in field B is 30%. If it does, the probability the well will be successful is 55%. Drilling in field A is independent of drilling in field B and the success of the wells are independent from each other. If a well in field A is successful, the company expects a profit of $20,000. If a well in field B is successful, the company expects a profit of $35,000. What is the expected profit of the company? (HINT: build two tree diagrams: one for field A and one for field B)

Explanation / Answer

For Field A:

P( a well in Field A is successful ) = 0.40*0.45 = 0.18

Expected profit from field A = 0.18*20000 = 3600

For Field B :

P(a well in Field B is successful ) =0.30*0.55 = 0.165

Expected profit from field B is 0.165*35000 = 5775

The expected Profit of the company = 3600+5775 = 9375

Answer : Expected Profit of the Company = $ 9375

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