question archive Mary Decker is suing the manufacturer of her car because of a defect that she believes caused her to have an accident, and kept her out of work for a year
Mary Decker is suing the manufacturer of her car because of a defect that she believes caused her to have an accident, and kept her out of work for a year
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Mary Decker is suing the manufacturer of her car because of a defect that she believes caused her to have an accident, and kept her out of work for a year. She is suing the company for $3.5 million. The company has offered her a settlement of S700,000, of which Mary would receive $600,000 after attorneys' fees. Her attorney has advised her that she has a 50% chance of winning her case. If she loses she will incur attorneys' fees and court costs of $75,000. If she wins she is not guaranteed her full requested settlement, her attorney believes that there is a 50% chance she could receive the full settlement, in which case Mary would get S2 million after her attorney takes his cut, and a 50% chance that the jury will award her a lesser amount of $1,000,000, of which Mary would get S500,000. Using a decision-tree analysis, decide if Mary should sue the manufacturer
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Answer:
The expected present value of the decision in case the settlement is agreed ot is given to be $600,000.
Now in case there is no settlement made, there are 3 possibilities that could happen in case suing is done. These are given to be:
- The case fails and she looses 75,000 that is -$ 75,000 with probability = 0.5
- Wins case and full settlement is done, she gets 2,000,000. Therefore in thie case it would be + 2,000,000 with probability = 0.5*0.5 = 0.25
- Wins case but full settlement is not done, she gets 500,000. Therefore in thie case it would be + 500,000 with probability = 0.5*0.5 = 0.25
Therefore expected present value in this case would be given as:
= 0.5*(-75,000) + 0.25*(2,000,000) + 0.25*(500,000)
= -37,500 + 500,000 + 125,000
= $ 587,500 which is less than $600,000
Therefore she should not sue the manufacturer and should have the settlement.
