Question

5. Mary Decker is suing the manufacturer of her car because of a defect that she believes caused her to have an accident and kept her out of work for a year. She is suing the company for $8 million. The company has offered her a settlement of $1 million, of which Mary would receive $700,000 after attorneys' fees. Her attorney has advised her that she has a 60% chance of winning her case. If she loses, she will incur attorneys' fees and court costs of $60,000. If she wins, she is not guaranteed her full requested settlement. Her attorney believes that there is a 30% chance she could receive the full settlement, in which case Mary would get $5 million after her attorney takes his cut, and a 70% chance that the jury will award her a lesser amount of $3 million, of which Mary would get $2 million. Using a decision-tree analysis, decide if Mary should sue the manufacturer.

Answer 1

SILE Full amount 30% Win 60% (A Lesseram 70% amount Do not $700,000 C С $5,000,000 Sue B В $2,000,000 Losse 40% $60,000) Expected Value at A = (30*7.64 $5,000,000) +670% of $2,000,000) = $1,500,000 + $1,400,000 Expected Value at B-8023 $2,900,000) +(40% of ($60,000)) = $1,740,000 - $24,000 - $1,716,000 Since, Expected value at B is greater than value for not suing ($700,000), Many should sue the car manufacturer.