1. The Technically Techno company has several patents for a variety of different

Question

1. The Technically Techno company has several patents for a variety of different Flash memory devices that are used in computers, cell phones, and a variety of other things. A competitor has recently introduced a product based on technology very similar to something patented by Technically Techno last year. Consequently, Technically Techno has sued the other company for copyright infringement. Based on the facts in the case as well as the record of the lawyers involved, Technically Techno believed there is a 40% chance that it will be awarded $300,000 if the lawsuit goes to court. There is a 3% chance that they would be awarded only $50,000 if they go to court and win, and there is a 30% chance they would lose the case and be awarded nothing. The estimated cost of legal fees if they go to court is $50,000. However, the other company has offered to pay Technically Techno $75,000 to settle the dispute without going to court. The estimated legal cost of this would only be $10,000. If Technically Techno wished to maximize the expected gain, should they accept the settlement offer?

a) Complete the following payoff table:

Alternative Win Big Win Small Lose

Go to Court

Settle

Probability 0.4 0.3 0.3

b) If Techno wished to maximize the expected gain (EMV), should they accept the settlement offer? (Please show your steps)

EMV (go to court) =

EMV (settle) =

What is the maximum EMV?

Should they accept the settlement offer? Yes/No

Explanation / Answer

a. Completing the payoffs:

b. EMV( go to court ) = 0.4 * 250,000 + 0.3 * (-20,000) + 0.3 * (-50,000)

= 79,000

EMV (settle ) = 0.4 * 65,000 + 0.3 * 65,000 + 0.3 * 65,000 = 65,000

Maximum EMV is 79,000.

They should not accept settlement offer as EMV(settle) < EMV(go to court). Answer: No

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