# 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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