Little Electronics Company has initiated an antitrust and unfair trade practices lawsuit against Artex Computers, asking for a settlement of $10 million in damages. On Nov. 4, Little receives an offer from Artex to settle the suit for a payment to Little of $3.5 million.
The management at Little is trying to decide whether to accept the settlement or to proceed with the suit. The lawyers agree that the chances are about two in three that Little will win. They point out, however, that even if Little wins the suit, the chances are only about one in two that the judge is equally likely to grant a partial settlement of $5 million. The lawyers further estimate it will cost about $200,000 in legal fees between November and June (when the case is scheduled to be heard), plus another $100,000 in legal fees to try the case (which is expected to last three months).
In making an offer for the $3.5 million settlement, Artex stressed that it was a "final offer" and that the offer would be good for only 30 days. However, Little management and lawyers agree that Artex will probably make a new offer in June, just before the trial begins. After some thought, it is decided that 0.60 is a good estimate of the probability of a new Artex offer in June. And if there is a new offer, the chances are 7 in 10 that it will be $4.5 million and 3 in 10 for a $5.5 million settlement.
If Artex makes no last minute offer in June, Little itself can initiate a settlement. In this case, Little will have to settle for $2.5 million, because Artex will interpret the action as weakness in Little's case.
Diagram the decision problem facing Little Electronics. Assuming Little is willing to use EMV in making this decision, what strategy should be used?
I have no idea how to begin a problem like this. Can you help me determine the steps necessary to solve it?
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