Question

Determine the expected value of the amount that could be paid to Jacobs Co in a settlement. Use the 67% probability figure that the plaintiff wins and is awarded 60% of the amount requested. Also, determine a maximum and minimum expected value for the settlement figure based on the confidence interval above. Be sure to include all the damages Jacobs Co will be able to recover. How would you interpret your expected values?

EXTRA INFO: Michael Thomas was aware of the results of a recent survey of 1,400 past negligence cases in the State of Gould. In 67% of these cases, the plaintiff was awarded damages. On average the amount awarded was approximately 60% of the amount requested by the plaintiff, excluding punitive damages, which were not included in the study.
A payment of $1,250 as reimbursement for the unnecessary expenditure. A payment of $6,000 to cover the cost of time. A payment of $8,000 in the form of punitive damages

Answer 1

The expected value of settlement for Jacobs Co, based on a 67% win probability and 60% damage recovery rate, is $2,913. The minimum expected value is $0, and the maximum is $7,250, which represents the total recoverable damages excluding punitive damages. These values serve as estimates reflecting the averages observed in past negligence cases.

Step-by-step explanation:

To calculate the expected value of the settlement amount that Jacobs Co might receive, we must use the probability given and the average payout ratio. With a 67% probability of winning and an average award of 60% of the requested amount, the expected settlement could be determined as follows: Expected Settlement = Probability of Winning * Average Payout Percentage * Total Recoverable Damages. As given in the scenario, Jacobs Co can recover $1,250 for unnecessary expenditure, $6,000 for cost of time, and $8,000 in punitive damages. However, the punitive damages were not considered in the probability study, so they are not included in the expected value calculation.

Ignoring punitive damages, the total recoverable amount is $1,250 + $6,000 = $7,250. Therefore, the expected value of the settlement is:

Expected Settlement = 0.67 * 0.60 * $7,250 = $2,913

However, since the settlement can range from $0 (if Jacobs Co loses the case) to the total recoverable damages (if they win and are awarded 100% of the requested amount), the minimum expected value is $0 and the maximum expected value is $7,250.

When interpreting these expected values, they represent the mean settlement amounts that can be anticipated based on the given probabilities and statistics from past cases. It's worth noting that while the expected value provides a reasonable estimate, the actual settlement can vary due to the uncertainty and variability in legal cases.