Katie Lee had a car accident and was out of work for a year. Katie's parents believe that the accident was caused by a vehicle defect. Her family consulted some lawyers and planned to sue the vehicle manufacturer for $3.5 million. During negotiations, the legal team of the vehicle manufacturer offered a $700K settlement. Katie's family was advised that they would need to settle the $100K in legal fees if they agree to the settlement. Katie's parents asked their lawyer for advice and their lawyer told them that they have a 50% chance of winning the case. If the decision favors the vehicle manufacturer, Katie's family loses and will have to pay legal fees to the tune of $75K. However, they were cautioned that even the decision favors Katie, the full requested settlement is not guaranteed. The lawyer believes that there is a 50% chance that Katie's family would receive the full settlement amount they requested, of which Katie needs to settle $1.5 million in legal fees. There is a 50% chance that the jury will award Katie $1 million, of which 50% will be taken up by legal fees. Which of the following is Katie's best option? Group of answer choices Katie should accept the settlement. She will receive $600,000. Cannot be determined. Katie should not accept the settlement and sue the company. She will receive $600,000. Katie should not accept the settlement and sue the company. She will receive $500,000. Katie should accept the settlement. She will receive $700,000. Katie should not accept the settlement and sue the company. She will receive $2 million. Katie should accept the settlement. She will receive $587,500. Katie should not accept the settlement and sue the company. She will receive $1.25 million.
Question 11
Katie Lee had a car accident and was out of work for a year. Katie's parents believe that the accident was caused by a vehicle defect. Her family consulted some lawyers and planned to sue the vehicle manufacturer for $3.5 million. During negotiations, the legal team of the vehicle manufacturer offered a $700K settlement. Katie's family was advised that they would need to settle the $100K in legal fees if they agree to the settlement. Katie's parents asked their lawyer for advice and their lawyer told them that they have a 50% chance of winning the case. If the decision favors the vehicle manufacturer, Katie's family loses and will have to pay legal fees to the tune of $75K. However, they were cautioned that even the decision favors Katie, the full requested settlement is not guaranteed. The lawyer believes that there is a 50% chance that Katie's family would receive the full settlement amount they requested, of which Katie needs to settle $1.5 million in legal fees. There is a 50% chance that the jury will award Katie $1 million, of which 50% will be taken up by legal fees.
Which of the following is Katie's best option?
Group of answer choices
Katie should accept the settlement. She will receive $600,000.
Cannot be determined.
Katie should not accept the settlement and sue the company. She will receive $600,000.
Katie should not accept the settlement and sue the company. She will receive $500,000.
Katie should accept the settlement. She will receive $700,000.
Katie should not accept the settlement and sue the company. She will receive $2 million.
Katie should accept the settlement. She will receive $587,500.
Katie should not accept the settlement and sue the company. She will receive $1.25 million.
Question 12
A business owner is planning to strategize his company's growth. He can either buy, rent, or lease a new factory depending on how the business is doing. He was given the following payoff table (amounts in $000s) based on whether the business is doing good or the business is slow.
|
Alternative |
Business Doing Good |
Business is Slow |
|
Probability |
.70 |
0.30 |
|
Buy |
90 |
-10 |
|
Rent |
70 |
40 |
|
Lease |
60 |
55 |
The probability of business doing good is 0.7 and the probability of slow business is 0.3.
Using Laplace's method, the best strategy is ________.
Group of answer choices
Buy
Lease
Cannot be determined.
Rent
Do nothing
Question 13
Consider the following payoff table that represents the profits earned for each alternative (Y1, Y2, and Y3) under the states of nature X1, X2, and X3. Using the maximax criterion, what would be the highest expected payoff?
|
X1 |
X2 |
X3 |
|
|
Probability |
.65 |
.15 |
.20 |
|
Y1 |
100 |
145 |
120 |
|
Y2 |
75 |
125 |
110 |
|
Y3 |
95 |
85 |
60 |
Group of answer choices
110
Cannot be determined.
100
125
145
120
Question 14
Felicidad Ramirez has come of age and now has access to a very substantial trust fund. The trust fund allows her to invest part of the money she will inherit. Felicidad is a multi-awarded pastry chef and has been working as a head baker in one of the trendy bakeries in New Jersey.
With her newfound fortune, Felicidad is now considering opening her own bakery. She wants to start one in Seattle where she was born and raised. However, she also has some friends who believe that she should also open a "twin" branch in New York where they feel her trendy baked goodies would be very well-accepted by the market. Felicidad's friends think that it would be so cool if she could open the two locations at the same time. Felicidad is mulling over her options and is also considering to continue working at her current job and not open her own bakeries.
Felicidad's best friend, Travis, helped her prepare a payoff table to help her analyze the situation.
|
States of Nature (amounts are in $'000s) |
|||
|
Alternatives |
Very Favorable |
Favorable |
Unfavorable |
|
Open in Seattle |
380 |
70 |
-400 |
|
Open in Seattle and New York |
200 |
80 |
-200 |
Felicidad believes that there is a 30 percent chance that the market will be unfavorable, a 30 percent chance that it will be favorable, and 40 percent chance it would be very favorable. Travis advised Felicidad that they should hire Manny, a consultant, to help them analyze the market situation in greater detail. Manny mentioned that he provides a money-back guarantee.
The most Felicidad should pay Manny for his services is $___________.
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