Consider a slip-and-fall case in which a plaintiff is suing a defendant. It is common knowledge that if the case goes to trial the plaintiff will win $30,000 from the defendant with probability 1⁄2 and the plaintiff will win $5,000 from the defendant with probability 1⁄2. a Compute the expected amount of money the plaintiff will win from the defendant if the case goes to trial. b Suppose that the plaintiff has initial wealth of $1,000 and utility function u(c) = c1/2. Let x be the least amount of money that she would be willing to accept from the defendant to settle the case and avoid trial. Carefully set up the equation that defines x by equating her expected utility from settling the case for x dollars and thereby avoiding the uncertainty of the trial with her expected utility from going to trial. Solve the equation for x to the nearest dollar. c Suppose that the defendant has initial wealth of $50,000 and utility function v(c) = log(c). Let y be the most amount of money that he would be willing to pay the defendant to settle the case and avoid trial. Carefully set up the equation that defines y be equating his expected utility from settling the case by paying y dollars and thereby avoiding the uncertainty of the trial with his expected utility from going to trial. Solve the equation for y to the nearest dollar.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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4 Consider a slip-and-fall case in which a plaintiff is suing a defendant. It is common knowledge that if the case goes to trial the plaintiff will win $30,000 from the defendant with probability 1⁄2 and the plaintiff will win $5,000 from the defendant with probability 1⁄2. a Compute the expected amount of money the plaintiff will win from the defendant if the case goes to trial. b Suppose that the plaintiff has initial wealth of $1,000 and utility function u(c) = c1/2. Let x be the least amount of money that she would be willing to accept from the defendant to settle the case and avoid trial. Carefully set up the equation that defines x by equating her expected utility from settling the case for x dollars and thereby avoiding the uncertainty of the trial with her expected utility from going to trial. Solve the equation for x to the nearest dollar. c Suppose that the defendant has initial wealth of $50,000 and utility function v(c) = log(c). Let y be the most amount of money that he would be willing to pay the defendant to settle the case and avoid trial. Carefully set up the equation that defines y be equating his expected utility from settling the case by paying y dollars and thereby avoiding the uncertainty of the trial with his expected utility from going to trial. Solve the equation for y to the nearest dollar. Please show all work

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