(30 pts) The plaintiff could either have a high probability,h, or a low probability, l, of winning a judgement of $ at trial where 0<l<h<1. The true probability is known by the plaintiff but not by the defendant who only knows that the likelihood is 0<p<1 that the plaintiff's probability is high and 1-p that it is low. The plaintiff and defendant are risk-neutral and would have trial costs of $c each if the case were not settled. Consider two different rules for allocating trial costs:  

American Rule. Each party to the suit pays their own trial costs.

English Rule. The losing party pays the trial costs of both parties.

Under the American Rule what would be the lowest offer that a low probability plaintiff would accept? What would be the expected cost to the defendant of making the lowest settlement offer that only a low probability plaintiff would accept? What is the expected cost of making the lowest settlement offer that both types of the plaintiff would accept?

edit- well i can get the expected values, i just cant figure out how to relate them to the specific questions theyre asking

Post edited at 7:06 am on Sep. 16, 2008 by jennay