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Probability Question

  1. Nov 5, 2008 #1


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    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


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


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    OK I think I got it

    (-$2mil)*(8/30) + (+$4mil)*(4/30) = -16/30 mil + 16/30 mil = 0
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