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Some of the relevant costs and benefits

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Reference no: EM131483570

(Value of a Claim) Be very clear and show calculations

Consider the facts given below, then answer each question in a sentence.

Facts: Paulo injures Maeki, causing damages of $5000. Maeki must decide whether or not to assert a legal claim. If Maeki asserts a legal claim, he will face additional decisions in trying to resolve the dispute. Here are some of the relevant costs and benefits:

- The cost to Maeki of filing suit is $100.

- If he files suit, there is a 10% chance that Paulo will offer Maeki $500 to settle the case at that time and a 90% chance that Paulo will make no offer to settle at that time.

- Discovery would cost Maeki $1000.

- If Maeki proceeds with discovery, he expects that Paulo will offer to settle for $2000 with probability 0.20, and he expects that Paulo will make no offer to settle with probability 0.80.

- If Maeki proceeds to trial, there is a 50% chance that, following completion of the trial; Maeki will win a judgement of $5000 against Paulo.

- A trial would cost Maeki $1500.

- There is a 50% chance that Maeki will win nothing at trial.

- If he loses at trial, an appeal will cost him $500.

- If Maeki loses at trial, there is a 15% chance that he will win a $5000 judgement against Paulo on Assume that both parties are risk neutral and assume that Maeki wants to acts in the way that maximizes the expected value of his net payoff.

A. On the back of this sheet, draw the extended form game of the situation.

B. Should Maeki file suit? What is the expected net value of filing suit? Hint :EVC

C. If, immediately after Maeki file suit, Paulo offers to settle for $290, should Maeki accept? Hint: EVD

D. If, following discovery but before trail, Paulo offers $1200 to Maeki to settle, should Maeki accept the offer or proceed to trial? Hint: EVT

E. Assume Maeki loses at trail. After trail, Paulo offers to settle with Maeki for $225. Should Maeki accept this offer? Hint: EVA

Reference no: EM131483570

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