Tek, a technology company, has several patents for a variety of memory devices t

Question

Tek, a technology company, has several patents for a variety of memory devices that are used in computers. A competitor has recently introduced a product that uses technology very similar to something patented by Tek. Based on the facts in the case as well as the record of the lawyers involved, Tek believes there is a 40% chance that it will be awarded $300,000 if the lawsuit goes to court. There is a 30% 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 Tek $75,000 to settle the dispute out of court. If Tek wishes to maximize the expected gain, should they accept the settlement offer?

Explanation / Answer

the expected gain =sum of P*amount
where P is the probability
=0.4*300000+0.3*50000-0.3*50000
=120000
the expected gain from lawsuit goes court is higher than the $75000, so he will not accept the settlement offer

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