Jay Boyville Corporation is being sued by Lark Dent. Lark can settle out of court and win $40,000, or go to court. If Lark goes to court, there is a 30% chance that she will win the case. If she wins,...

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Jay Boyville Corporation is being sued by Lark Dent. Lark can settle out of court and win $40,000, or go to court. If Lark goes to court, there is a 30% chance that she will win the case. If she wins, a small and a large settlement are equally likely (a small settlement nets $50,000, and a large settlement nets $300,000).


a If Lark is risk-neutral, what should she do? What should Lark do if her utility function for an increase x in her cash position is given by u(x) = x1/2?


b For $10,000, Lark can hire a consultant who will predict who will win the trial. The consultant is correct 90% of the time. Should she hire the consultant? (Assume Lark is risk-neutral.) What is EVSI?


c If Lark is risk-neutral, what is EVPI?



Answered Same DayDec 24, 2021

Answer To: Jay Boyville Corporation is being sued by Lark Dent. Lark can settle out of court and win $40,000,...

David answered on Dec 24 2021
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