A firm might be liable for $10 million if a lawsuit is brought against it. The firm judges that the probability the suit will be brought is .6. In addition, it believes that its chance of winning such a suit (in which case it owes $0) is .7. The firm's overall expected liability is:
A) $6 million.
B) $4.2 million.
C) $3 million.
D) $1.8 million.
E) $1.2 million.

Question

Quizplus · Accepted Answer

The firm's overall expected liability is calculated by multiplying the probability of the lawsuit being brought (.6) by the probability of losing the lawsuit (1 - .7 = .3) and then by the potential liability ($10 million). This gives an expected liability of .6 * .3 * $10 million = $1.8 million.

A Firm Might Be Liable for $10 Million If a Lawsuit