Meredith Delgado Owns a Small Firm That Has Developed Software

Meredith Delgado owns a small firm that has developed software for organizing and playing music on a computer.Her software contains a number of unique features that she has patented so her company's future has looked bright.However,there now has been an ominous development.It appears that a number of her patented features were copied in similar software developed by MusicMan Software,a huge software company with annual sales revenue in excess of $1 billion.Meredith is distressed.MusicMan Software has stolen her ideas and that company's marketing power is likely to enable it to capture the market and drive Meredith out of business.In response,Meredith has sued MusicMan Software for patent infringement.With attorney fees and other expenses,the cost of going to trial (win or lose)is expected to be $1 million.She feels that she has a 60% chance of winning the case,in which case she would receive $5 million in damages.If she loses the case,she gets nothing.Moreover,if she loses the case,there is a 50% chance that the judge would also order Meredith to pay for court expenses and lawyer fees for MusicMan (an additional $1 million cost).Music Man Software has offered Meredith $1.5 million to settle this case out of court.(a)Construct and use a decision tree to determine whether Meredith should go to court or accept the settlement offer,assuming she wants to maximize her expected payoff.(b)To implement the equivalent lottery method to determine appropriate utility values for all the possible payoffs in this problem,what questions would need to be asked of Meredith? (c)Suppose that Meredith's attitude toward risk is such that she would be indifferent between doing nothing and a gamble where she would win $1 million with 50% probability and lose $500 thousand with 50% probability.Use the exponential utility function to re-solve the decision tree from part a.