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

Lewis Harvey

Lewis Harvey

Answered question

2021-09-26

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?

Answer & Explanation

odgovoreh

odgovoreh

Skilled2021-09-27Added 107 answers

let Xi; be the random variable for site A.
Construct a payoff table:
xi$30$3pi0.20.8
Determine the expected value using formula E(X)=xp(x)
E(X)=20(0.2)3(0.8)
=42.4
=1.6
Therefore the expected value is 1.6.

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