Question

A mining company is considering two sites on which to dig, described as follows: Site A: Profit if diamonds are found: $80 million. Loss if no diamonds are found: $20 million. Probability of finding diamonds: 0.2 Site B: Profit if diamonds are found $140 million. Loss if no diamonds are found $17 million. Probability of finding diamonds: 0.1

Answer 1

The expected value is a weighted average generalization. The company must choose to mine on site A.

What is the expected value?

The expected value is a weighted average generalization. Informally, the expected value is the arithmetic mean of a large number of independently chosen random variable outcomes.

To know on which site the company should mine, we need to calculate the expected profit that the company will get from each site. Therefore, the expected profit from each site will be,

Site A:

Expected profit = (0.2)($70 million) + (0.8)(-$15 million) = $2 million

Site B:

Expected profit = (0.1)($140 million) + (0.9)(-$21 million) = -$4.9 million

Since the value from Site B is negative, therefore, the company must choose to mine on site A.

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