Let us return to the Texaco-Pennzoil example from Chapter 4 and think about Liedtke's risk attitude. Suppose that Liedtke's utility function is given by the utility function in Table 13.5.
aGraph this utility function. Based on this graph, how would you classify Liedtke's at- titude toward risk?
bUse the utility function in conjunction with the decision tree sketched in Figure 4.2 to solve Liedtke's problem. With these utilities, what strategy should he pursue? Should he still counteroffer $5 billion? What if Texaco counteroffers $3 billion? Is your an- swer consistent with your response to part a?
cBased on this utility function, what is the least amount (approximately) that Liedtke should agree to in a settlement? (Hint:Find a sure amount that gives him the same ex- pected utility that he gets for going to court.) What does this suggest regarding plau- sible counteroffers that Liedtke might make?