1. Expected value calculations provide rules you should follow when making a decision. T or F?
2. If you flip a coin 20 times and it comes up heads every time, it is more likely to come up tails on the next flip. T or F?
3. To think critically we need to activate our system one thinking. T or F?
4. Playing the lottery is a wise way to save for retirement. T or F?
5. You should only buy house insurance if it maximizes expected value. T or F?
6. What are two reasons why clear business communication matters? (Full sentences or point form is fine).

Senerio 1:

Concerned about the possibility of being sued, Modus's CEO, Rajay Karunakaran, just had a meeting with the company's VP and General Counsel (that is, their lawyer), Andre Serrano. Now Rajay is reflecting on how hefeelsabout the legal risks his company faces. In his head, he pictures what it would be like to be sued, and the effect that would have on him and his employees. He thinks back to a hypothetical scenario that Andre had outlined for him, one that involved being sued for $500,000. Rajay had asked Andre how likely it was that the company wouldlosesuch a lawsuit. Andre, citing the uncertainty of the law regarding medical devices, says, "That's a hard question, but let's assume it's 50/50." So, he's saying there's a 50% chance of winning and a 50% chance of losing.Now, Rajayhatesthe idea of having to go to court. Going to court and losing would be a very bad scenario. Evenwinningin court would not be great, since his staff would have to take time away from valuable projects in order to testify, and it would also bring some bad publicity (being sued always looks bad, even if you win). The ideal situation, Rajay thinks, would be to make an out-of-court offer of $200,000 and for that offer to be accepted. Of course, if it is not accepted the case would go to court after all. When Rajay asks Andre how likely it is that such an offerwouldbe accepted, Andre grins and says, "Well the other guys probably don't like going to court either, so let's assume there's an 80% chance they'll accept." If they accept, you pay $200,000. If they don't, you go to court.

7) Assign reasonable utility numbers (on a scale from 0 to 10) for the following scenarios.Going to court and winning ___Going to court and losing ___Settling out of court for $200,000 ___

8) From Rajay's point of view, what is theexpected utilityof trying to settle out of court for $200,000?

9) From Rajay's point of view, what is theexpected utilityof going to court right away?

Senerio 2

Recognizing the risk of being sued, Modus is considering buying insurance to guard against the financial consequences of a potential lawsuit. The company's best estimate is that there is a 1.5% chance of a serious failure of one of their test-kits, resulting in a lawsuit, over the next year. Andre Serrano estimates that in the case of such a serious failure a court is almost certain to find in favour of the patient, andon averageto award the patient damages of about $1.25 million.

10)Option A:What is the expected value of taking this risk, and not buying insurance at all for the coming year? (Show your math.)

11) Option B:What is the expected value of buying, in this context, an insurance policy that costs $4,500 for the year, and that would cover up to $800,000 in damages in case of a lawsuit? (Show your math.)

12) Option C:What is the expected value of buying, in this context, an insurance policy that costs $8,000 for the year, and that would coveralldamages in case of a lawsuit,aftera deductible of $100,000? (Show your math.)

13) Option D:What is the expected value of buying, in this context, an insurance policy that costs $24,500 for the year, and that would coveralldamages in case of a lawsuit? (Show your math.)

14)Andre is of course only providing a very rough estimate when he says that "in the case of a serious failure, a court is almost certain to find in favour of the patient, andon averageto award the patient about $1.25 million." He can't really say for sure, and probably nobody can. The court might award $1,000 or $100,000 or even $2,000,000. Who knows?

So, perform a sensitivity analysis to determinehow highthe amount expected to be awarded to the patient would have to be, in order fornotbuying insurance to have a lower (worse) expected value for Modus than buying the insurance in Option D in scenario #2 of this test. (Note that you will need to pull some information from scenario #2 to answer this question correctly). [4 points]

15) Basedonlyon your calculations from Scenario #2, imagine Rajay writing a memo to Andre, issuing his decision regarding whether to buy insurance against being sued. What might thefinalparagraph of Rajay's memo say?