Jay Boville Corporation is being sued by Lark Dent. Lark Dent can settle out of court and win $40,000 or go to court. If Lark goes to court, there is a 30% chance that she will win the case. If she wins, a small and a large settlement are equally likely. A small settlement nets $50,000 and a large settlement nets $300,000.
a) If Lark is risk-neutral, what should she do?
b) What should Lark due if her utility function for an increase in her cash position is given by .
c) For $10,000 Lark can hire a consultant who will predict who will win the trial. The consultant is correct 90% of the time. Should she hire the consultant? (Assume she is risk neutral). What is EVSI?
d) If Lark is risk neutral what is EVPI?