An Oil Company Is Trying to Decide If It Will

question 12

Multiple Choice

An oil company is trying to decide if it will be worth their money to drill a well in a certain area. They determine that it will cost $125,000 to drill the well. The three possible outcomes of the drilling are a dry well, a "medium" strike that would produce about $700,000, and a big strike that would produce about $1,250,000. The company has estimated that the probability of a "medium" strike is 1/10 and the probability of a big strike is 1/22. What is the oil company's expected value for drilling a well in this area?

• A) $31,818.18
• B) $1818.18
• C) -$126,818.18
• D) $116,401.52
• E) -$108,636.36

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