Decision analysis. After careful testing and analysis, an oil company is conside

Lewis Harvey 2021-09-26 Answered
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 $20 million if successful (probability.2) and lose $3 million if not (probability .8); site B will net $80 million if successful (probability .1) and lose $7 million if not (probability.9). Which site should the company choose according to the expected return from each site?
1. What is the expected return for site A?

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Expert Answer

odgovoreh
Answered 2021-09-27 Author has 24146 answers

let \(\displaystyle{X}_{{{i}}}\); be the random variable for site A.
Construct a payoff table:
\(\begin{array}{|c|c|}\hline x_{i}&$30&-$3\\ \hline p_{i}&0.2&0.8\\ \hline\end{array}\)
Determine the expected value using formula \(\displaystyle{E}{\left({X}\right)}={x}\cdot{p}{\left({x}\right)}\)
\(\displaystyle{E}{\left({X}\right)}={20}{\left({0.2}\right)}-{3}{\left({0.8}\right)}\)
\(\displaystyle={4}-{2.4}\)
\(\displaystyle={1.6}\)
Therefore the expected value is 1.6.

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