Question

Suppose the firm has a fixed cost of $20,000 in preparing equipment prior to doing its first exploration. if each successful exploration costs $30,000 and each unsuccessful exploration costs $15,000, find the expected total cost to the firm for its ten explorations.

Answer 1

The total cost will vary depending what combination of explorations are successful and what are unsuccessful. The lowest cost would be if all explorations were unsuccessful and the highest cost would be if all of them are successful. In this scenario, the lowest cost would be $170,000 and the highest cost would be $320,000. Every other combination of success and failure would result in costs between those two numbers.