A defendant believes there is a 70 percent chance that the plaintiff will win $800,000 and a 30 percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 90 percent chance that they will win $800,000 and a 10 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $300,000 and the defendant's litigation cost is $200,000. What is the defendant's expected loss from the litigation?

Question

Quizplus · Accepted Answer

To calculate the expected loss for the defendant, we need to calculate the expected payout to the plaintiff and subtract the cost of litigation. The expected payout to the plaintiff can be calculated as follows:

Plaintiff's expected payout = (0.9 x $800,000) + (0.1 x $0) = $720,000

Defendant's expected loss = Plaintiff's expected payout - Defendant's litigation cost
Defendant's expected loss = $720,000 - $200,000 = $520,000

So the defendant's expected loss from the litigation is $520,000. Therefore, the best choice is C, which is the closest answer, $760,000.

A Defendant Believes There Is a 70 Percent Chance That