The decision tree for Plaintiff is given below, with the relevant payoffs. In the tree, CF is the cost of filing a suit, CS is the cost of out-of-court settling, CT is the cost of trial, CA is the cost of appeal, PW is the probability of winning the trial by Plaintiff, PA is the probability of winning the appeal by Plaintiff. The parties are perfectly aware of each other's costs and evaluations of probabilities.

Assume the following ("excessive relative optimism"): ? Each party, Plaintiff and Defendant, pay their own costs. Both parties encounter the costs at every stage; the only difference is Plaintiff pays CF if she files the complaint, Defendant does not pay anything at the filing stage. Parties do not perceive same probability PW. ? CF = $200. ? CS = $80. ? CT = $400. ? CA = $800. ? Plaintiff thinks that PW = 0.95 while Defendant thinks that PW = 0.05. ? Both parties perceive same probability PA = 0.5 (because they are totally ignorant of how the appeals work). ? The parties are unable to correct the excessive relative optimism at the settlement stage (i.e., possible bargaining during the settlement stage does not change their evaluations of probabilities PW and PA).

a. Calculate expected value of appeal EVA to Plaintiff.

b. Calculate expected value of trial EVT to Plaintiff.

c. Calculate expected value of trial EVTD to Defendant.

d. Find the reasonable settlement S to Plaintiff.

e. Calculate expected value of filing the complaint EVC to Plaintiff.

f. What will happen in this case (will the complaint be filed, will it be settled or proceed to trial, will the appeal be filed if Plaintiff loses the trial)?

do not file $0 C file complaint settle S Cs trial win 1,000 Pw lose do not appeal $0 CA appeal lose PA win $1000