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? I'm confused with this question.

Question

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? I'm confused with this question.

campbell_st · Answer

this is financial expactation

probability of losing in court = 0.2   since the probability of winning is 0.8

so the cost or financial expectation of trial loss is 

 0.2* 1100000 = 220000

which is less the the out of court settlement

recommend going to trial

campbell_st · Answer

oops financial expectation

anonymous · Answer

ohhh okay, thanks:)

campbell_st · Answer

hope it helps...

anonymous · Answer

Yeah makes sense. It annoys me when they make the questions sound harder then what they really are. Ridiculous.

campbell_st · Answer

good literacy skills are so important in math... good luck