6.2 You are a defendant in a lawsuit. The plaintiff’s expected gain from the lawsuit is $4 million.

You believe there is only a 1 percent chance of losing, so that your expected loss, including the cost of litigation, is $1 million. If you do lose, however, you will be required to pay a total of $40 million.

a. If neither you nor the plaintiff is risk averse, do you expect the suit to settle?

b. If you become risk averse, how does this change affect the likelihood of a settlement?

Explain your answer