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An oil-drilling company knows that it costs $25,000 to sink a test well. If oil is hit, the income for the drilling company will be $325,000. If only natural gas is hit, the income will be $155,000. If nothing is hit, there will be no income. If the probability of hitting oil is 1/40 and if the probability of hitting gas is 1/20, what is the expectation for the drilling company?

Respuesta :

The expected value for the drilling company, using a discrete distribution, is of -$9,125, that is, a loss of $9,125.

What is the mean of a discrete distribution?

The expected value of a discrete distribution is given by the sum of each outcome multiplied by it's respective probability.

Considering the cost that it takes to sink a test well, and the probabilities of each outcome, the discrete distribution is given by:

  • P(X = 300,000) = 1/40 = 0.025.
  • P(X = 130,000) = 1/20 = 0.05.
  • P(X = -25,000) = 1 - (0.025 + 0.05) = 0.925.

Hence the expected value is given as follows:

E(X) = 300000 x 0.025 + 130000 x 0 .05 - 25000 x 0.925 = -$9,125.

More can be learned about the expected value of a discrete distribution at https://brainly.com/question/13008984

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