A defendant believes there is a 40 percent chance that the plaintiff will win $1,000,000 and a 60 percent chance that the plaintiff will lose and be awarded nothing (zero). The plaintiff believes that there is a 60 percent chance that they will win $1,000,000 and a 40 percent chance that they will be awarded nothing (zero). The plaintiff's litigation cost is $300,000 and the defendant's litigation cost is $300,000. Which of the following statements is true?

Question

Quizplus · Accepted Answer

To calculate the expected value of the lawsuit, we need to find the probability-weighted outcome of the case. For the plaintiff, the expected value is:

(0.6 * $1,000,000) + (0.4 * $0) - $300,000 = $360,000 - $300,000 = $60,000

For the defendant, the expected value is:

(0.4 * -$1,000,000) + (0.6 * $0) - $300,000 = -$400,000 - $300,000 = -$700,000

As the expected value of the lawsuit is negative for the defendant, they have an economic incentive to settle. The plaintiff, on the other hand, has an expected value of $60,000 if they go to trial. Therefore, they would be willing to accept any amount greater than their expected value to settle. Since their expected value is $60,000 and their litigation cost is $300,000, they would be willing to accept any amount greater than $300,000 to settle. Choice B is the correct answer.

A Defendant Believes There Is a 40 Percent Chance That