The expected value of litigation for both firms A and B both is $500,000 in favor of Firm A. The court costs for A and B are $60,000 and $100,000, respectively. Calculate the collective benefit that can be obtained if both firms agree to an out-of-court settlement.
A) $200,000
B) $160,000
C) $500,000
D) $40,000
E) $60,000

Question

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If both firms go to court, Firm A will get $500,000 and pay $60,000 in court costs, resulting in a net benefit of $440,000. For Firm B, they will lose $500,000 and pay $100,000 in court costs, resulting in a net loss of $600,000.

If they agree to an out-of-court settlement, they can negotiate for a lower amount than $500,000. If they settle for $400,000, for example, Firm A would receive $340,000 ($400,000 - $60,000 in court costs) and Firm B would lose $340,000 ($400,000 + $100,000 in court costs).

Therefore, the collective benefit would be $160,000 ($340,000 gained by Firm A - $180,000 lost by Firm B).

The Expected Value of Litigation for Both Firms a and B