Question

6. An oil wildcatter owns drilling rights at two widely separated locations. After consulting a geologist, he feels that at each location the odds against discovering oil if a well is drilled are 9 to 1. A well costs $100,000 to drill, and this is a total loss if no oil is found. On the other hand, if oil is discovered, rights to the oil can be sold for $1,600,000. The wildcatter has $100,000 available for drilling expenses. Find the mean and standard deviation of the wildcatter's profit a) if the $100,000 is used to drill a single well, Hint: Work with profits in units of $100,000 to simplify calculations.) b) if the wildcatter finds a partner to share costs and profits equally (each will receive 1/2 of the final profit, positive or negative) and their pooled funds are used to drill wells in two different locations.

Answer 1