Dismiss Notice
Join Physics Forums Today!
The friendliest, high quality science and math community on the planet! Everyone who loves science is here!

Probability Question

  1. Nov 5, 2008 #1


    User Avatar
    Gold Member

    An oil company submits a bid of $1 million on an offshore area that the government is releasing for drilling. The company will win the bid and be awarded exclusive rights to the area with probability of 0.4. If awarded the bid, the company will drill and will find oil worth $6 million with the probability 1/3, otherwise the hole will be dry and yield nothing. The company's drilling costs are $1 million. Find the expected value of the deal to the company

    OK I figure P(Winning the bid)=0.4 P(Losing the bid)=0.6 P(Striking Oil)=1/3 P(No Oil)=2/3 From decision tree I constructed, I figure

    P(Making Profit of $6mil - $1mil for drilling - $1mil for bid = $4mil profit)=(0.4)*1/3=4/30 ~= 13.33%

    P(Loss of $1mil for bid + $1mil for drilling = $2 million)=(0.4)*2/3 = 8/30 ~= 26.67%

    P(Losing the bid, but no loss of money)=0.6 = 60%

    Now my question is.. is this correct? the book has answer as '0' for some reason

    I've summed up total probabilities (13.33+26.67+60=100) so I think I got it right, where am I getting it wrong?
  2. jcsd
  3. Nov 5, 2008 #2


    User Avatar
    Science Advisor
    Homework Helper

    You didn't give the answer in your post! You gave the probabilities, but not the expected value.
  4. Nov 5, 2008 #3


    User Avatar
    Gold Member

    OK I think I got it

    (-$2mil)*(8/30) + (+$4mil)*(4/30) = -16/30 mil + 16/30 mil = 0
Know someone interested in this topic? Share this thread via Reddit, Google+, Twitter, or Facebook

Have something to add?

Similar Discussions: Probability Question
  1. Probability Question (Replies: 2)

  2. Probability question (Replies: 4)

  3. Probability Question (Replies: 21)

  4. Probability Question (Replies: 3)

  5. Probability questions (Replies: 1)