undefined Plaintiff suffers a loss and can choose either of two actions: Sue or Forgive-and-Forget. If Plaintiff sues, filing suit would cost 4, 000 dolars. At this point, assume that Defendant will attempt to settle the case by offering to pay Plaintiff 10, 000 dolars. If Plaintiff refuses this offer, they go to court and each side has to pay 2, 000 dolars in expenses. At court, there is an 80/100 chance that Plaintiff would win the case. After this initial judgment, the losing side has an opportunity to pay 3, 000 dolars to appeal the case.Plaintiff if wins initially, there is a 1/10 chance that an appeal by Defendant would reverse the judgment, but if Defendant wins initially, there is a 0.4 chance that an appeal by Plaintiff would reverse the judgment. If Plaintiff wins eventually, he is entitled to collect 15, 000 dolar from Defendant. If Defendant wins eventually, he bears no further obligation.

All players are risk neutral.

1.Draw a game tree for this situation and solve it using backward induction. 2. Explain whether it is possible for Defendant to improve his position (compared to 1. question) by: I. compensating Plaintiff even before being sued, II. offering a different settlement amount, after being sued but before going to court.