Question: Sarah Gables is the President of Gable’s Department Store. Last year Jeremiah Walls, a 35 year old man, fell on the ice in the Gable department store parking lot. Walls, who hurt his wrist and fractured his ankle in the accident, has brought a suit against Gable’s.

Of course, Sarah Gable would like to settle out of court and hence has initiated discussion with Walls’ counsel. However, Gable is willing to go to trial if Walls’ attorney is unreasonable. The first step of the process is a summary judgment in which the judge will decide whether to hear the case. It will cost Gable $3,000 in attorney fees to prepare for summary judgment, and she estimates that there is 90% chance that the judge will decide to hear the case and 10% chance that the case will be dismissed. If the case is heard, Gable’s best guess is that there’s a 2-in-3 chance that Walls will win, with an expected award of $50,000. A court trial will cost Gable another $10,000 in lawyer’s fees.

a) (10 points) Assume that Gable makes her decision on the basis of expected value. What is the most she would be willing to pay to avoid going to trial?

b) (10 points) If Walls wins, Gable may appeal the decision. There is a 25% chance that the judge will hear the appeal. If the judge hears an appeal, there is a 90% chance that Walls will win, with the same expected award of $50,000. If Gable appeals, additional attorney fees will be $2,000, with an additional $5,000 if the appeal is heard. If Walls wins, should Gable appeal?