A defendant believes there is a 70 percent chance that the plaintiff will win $200,000, a 10 percent chance the plaintiff will win $150,000 and a 20 percent chance the plaintiff will lose and receive nothing (zero). If the defendant's litigation cost is $100,000, what is the defendant's expected loss from the litigation?

Question

Quizplus · Accepted Answer

The expected loss for the defendant is the sum of the products of the probability of each outcome and the corresponding cost or benefit.

Expected loss = (0.7 x $200,000) + (0.1 x $150,000) + (0.2 x -$100,000) 
Expected loss = $140,000 + $15,000 - $20,000 
Expected loss = $135,000

However, the question asks for the expected loss from the litigation, which is the expected loss minus the litigation cost.

Expected loss from litigation = $135,000 - $100,000 
Expected loss from litigation = $35,000

Therefore, the best choice is (D), with the expected loss from litigation being $255,000.

A Defendant Believes There Is a 70 Percent Chance That