21) F

Statement 1:
Y-Oil bought right for = $500,000
Cost of drilling = $800,000
Total cost = $800,000 + $500,000 = $1,300,000

Money made from medium strike = $1,200,000
Hence, Y-Oil would make a loss of $100,000. Therefore statement 1 is true.

Statement 2:
The only way to make a profit is by landing a big strike which has a probability of 10% (0.1). This probability is less than 80% so statement 2 is true.

Statement 3:
If drilling costs are reduced, new cost would be = 0.75 x $800,000 = $600,000
Purchase price of rights = $500,000
Total cost = $600,000 + $500,000 = $1,100,000

Medium strike income = $1,200,000
Hence, Y-Oil would make a profit if they reduced the drilling price by 25%. Statement 3 is true.

All statements are true. Therefore, F is the correct answer.

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