Algebra Last question for tonight

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 $395,000. If only natural gas is hit, the income will be $125,000. 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?

asked by Mary Ann

  1. just multiply each event by its probability. The sum is the expected value of income. Then subtract the costs involved:

    (395000)(1/40)+(125000)(1/20)-25000

    Technically, we need all the probabilities to add to 1, so we should include the term for a dry well:

    (0)(37/40)

    but that adds nothing to the result.

    posted by Steve

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