3. P and D involved in a tort dispute. P's harm is 80,000. It is commonly known that the court will rule in the following way. With probability 1/2 the court will award 80,000 to P. With probability 1/4 the court will award 60,000 to P. Finally, with probability 1/4 the court will award 0 to P. Litigation is costly and results in a cost of 15,000 to each party. There is scope for settlement. Assume the outcome of settlement is determined by standard bargaining solution with equal bargaining weights.

For parts (a) and (b), assume that the "American" rule holds.

(a) What is the expected payoff from litigation for each party? Explain.

(b) Suppose, instead, that the parties settle. What is the outcome of settlement and what are the payoffs for each party? Explain.

Now, for parts (c) and (d), assume that the "English" rule holds. Assume that P is considered to win if the court awards a positive amount to P.

(c) What is the expected payoff from litigation for each party? Explain.

(d) Suppose, instead, that the parties settle. What is the outcome of settlement and what are the payoffs for each party? Explain.