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In a product liability case, a company can settle out of court for a loss of $350,000, or go to trial, losing $1,100,000 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. Should the company settle out of court?. yes or no?

Respuesta :

in order to figure this out, you need to find out the financial expectation.

based on the scenario we know that
The probability of losing is : 0.2
The probability of winning is : 0.8

So the cost of financial expectation is 0.2 x $ 1,100,000 = $ 220,000

$220,000 < $ 350,000

So it's better for the company to go to the Court

hope this helps

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