probability In a product liability case a company can settle

In a product liability case, a company can settle out of court for a loss of $350.000, or go to trial, losing $750,000 if found guilty and nothing if found not guilty. Lawyers for the company estimate the probability of a not-guilty verdict to be 0.8. a. What is expected value of the amount the company can lose tiy taking the case to cowl? b. Should the company settle out of court? Yes No

Solution

a) By taking case to court

Company can loose   $750000 with probability 0.2 if found guilty

                can loose    0     with probability 0.8 if not found guilty.

The expected amount = E ( x) = 750000*0.2 +0 *0.8 = 150000

The expected value of amount the company can loose by taking the case to court is $150000.

b) If company settle out of court will loose $350000. This amount is more than the amount company will loose by taking case to court.

So company should not settle out of court.