Settlement problems

 

Order Description

 

Four (simple) settlement problems
1. Assume that the law applicable to the case and the facts of the case are both crystal clear. Both Plaintiff (P) and Defendant (D) estimate that P will win the case if it goes to trial, with a probability of 100% (= 1.0), and receive a damages award of $100,000. Going to trial will cost P $20,000 (attorneys fees, lost time, etc.) and cost D $20,000 as well.
What is the estimated value (EV) to P of going to trial?
Formula is EV(to P) = [(prob. of P winning) x (payoff to P from winning)] – cost of trial to P
What is the estimated (negative) value to D of going to trial?
Formula is EV(to D) = negative [[(prob. of P winning) x (payoff to P from winning)] + cost of trial to D]
What will happen here?

2. Now assume that there is some uncertainty as to the law or facts, or both. Both P and D estimate that P will win the case if it goes to trial, with a probability of 70% (= 0.7), and receive a damages award of $100,000. Going to trial will cost P $20,000 and cost D $20,000.
What is the estimated value (EV) to P of going to trial?
What is the estimated (negative) value to D of going to trial?
What will happen here?

3. Now assume even more uncertainty as to the law or facts, or both. P estimates that he will win the case if it goes to trial, with a probability of 60% (= 0.6) and receive a damages award of $100,000. D estimates that there is only a 50/50 (= 0.5) chance that P will win if it goes to trial. D thinks P would receive a $100,000 damages award if P does win. Going to trial will cost P $20,000 and cost D $20,000.
What is the estimated value (EV) to P of going to trial?
What is the estimated (negative) value to D of going to trial?
What will happen here?

 

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