Easy Money Oil Co. is considering drilling in Billy Bob\'s back yard or his fron

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.

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