In a product liability case a company can settle out of cour

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.

What is the expected value of the amount the company can lose by taking the case to court?

Solution

A. probabilty of settle out of court X = 0.5

Probabilty of going to court Y = 0.5

Probabilty of winning in court = 0.8

Probabilty of losing in court =0.2

Expected value = Settle out of court + go to court and lose + go to court and win

Expected value = 0.5*350000 + 0.5*0.2*750000 + 0.5*0.8*0 = $250000