In Canada, provincial governments allocate to oil companies geographical regions

In Canada, provincial governments allocate to oil companies geographical regions in which to explore for oil. If they discover oil, they do not necessarily extract the oil since the cost of extraction may be higher than the market price for oil. However, the market price for oil continuously changes, so the oil may be commercially exploited at some date in the future. Oil companies own the rights to extract oil that they have discovered, but the value of that oil to the company depends on when in the future the oil price will be sufficiently high to make it worth extracting. An oil company estimates that, for a certain oil field, the probability that the oil price will be high enough to extract the oil is given in the following table. Assume that these events are independent of each other.

Probability of Oil Price Being Sufficiently High to Extract Oil Number of Years in the Future 0.1 0.25 0.32 4 0.45 0.5 3


Calculate the probability that the oil company will start to extract oil (a) in year 1; (b) in year 2; (c) in year 3; (d) in year 4; or (e) in year 5.

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