- D 9 Pts Suppose A Different Company Offers Ludo Corporation A Loss Control Service Which Costs S In Dollars And 1 (203.35 KiB) Viewed 39 times
(d) (9 pts) Suppose a different company offers Ludo Corporation a “Loss Control” service which costs S (in dollars) and which cuts the probability of all losses in half (such that the probability of both the small loss and the large loss are reduced to 1/6 rather than 1/3), meaning that the new probability distribution for the Ludo Corporation's pre-tax income is given by 100 – S with prob. 2/3 70 - S with prob. 1/6 20 – S with prob. 1/6 For what values of S will Ludo Corporation prefer to buy the Loss Control service instead of doing what you concluded it would do in part (c) above, in order to maximize its expected after-tax income? (Assume for simplicity that it cannot buy both insurance and Loss Control, but mușt buy either only one of them or neither of them.) I