A vendor offers an intrusion detection system (IDS) that costs $20,000 and claim

Question

A vendor offers an intrusion detection system (IDS) that costs $20,000 and claims that the IDS will reduce the probability of a major security breach significantly. A security administrator estimates the cost of a major security breach to be $800,000. She further estimates that without the IDS in place there is 3% chance of a major security breach. At most how high can the probability of a major security breach be with the IDS in place for a risk-neutral rational decision maker to purchase the IDS?

Explanation / Answer

without IDS, probable loss = 0.03* 800,000 = 24,000

With IDS, probable loss: (x/100)* (800,000 + 20,000) = 8200x

for purchase: 8200x < 24000

thus, x < 2.926 %

Thus, the possibily with IDS in place can be a maximum of 2.926% for a decision maker to purchase it.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.