Calculating Probability and Profit for Drilling Wells: A Binomial Approach

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In summary, Alexander Da Costa & Priyanka Kapadia Petroleum plans to drill 5 exploratory wells with the help of consulting geologists Jenny Wong & Danny Tieu. The probability of a discovery in the first 3 wells is 0.20, and if there is a discovery, the probability for the next 2 wells increases to 0.40. Otherwise, the probability for the next 2 wells is 0.15. Each well costs $500,000 to dig and a successful well results in a profit of $3,000,000 (before subtracting the cost of digging). Using binomial probabilities and a tree diagram, the probability distribution of the number of discoveries can be determined. The expected net profit
  • #1
adeel
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QUESTION3:
Alexander Da Costa & Priyanka Kapadia Petroleum, plans to drill 5 exploratory wells. Jenny Wong & Danny Tieu Consulting geologists give the probability that a well results in a discovery as 0.20 for the first 3 wells. If there is a discovery in the first 3 wells the geologist's probability is 0.40 for the next 2 wells. Otherwise the geologists give a probability of 0.15 for the next 2 wells. Digging each well cost $500,000, and each successful well will result in a profit of $3,000,000 (before subtracting cost of digging the well),

a. Use binomial probabilities and a tree diagram to find the probability distribution of the number of discoveries.
b. What will be the expected net profit and the standard deviation?
c. Does the distribution in part a) agree with the binomial distribution for n=5, and p=0.20? Why? Why not?

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I have a few issues. When they say, If there is a discovery in the first 3 wells, does that mean 1 discovery in any of the first 3 wells, or discovery in all 3 of the first 3 wells.

Also, would the profit function be 3000000x - 2500000?

Help is greatly appreciatd
 
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  • #2
cant anyone help me?
 
  • #3
wont anyone help me?
 
  • #4
Probably it means at least 1 discovery out of all 3 wells. Yes, that would be the profit function.
 
  • #5
i tried it that way and somewhere i am making a mistake...my expected standard deviation is MUCH MUCH higher than my expected net profit. But i guess it might be alright since there is a chance of negative profits
 

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