Suppose that you have sued your employer for damages suffered when you recently slipped and fell on an icy surface that should have been treated by your company’s physical plant department. Specifically, your injury resulting from this accident was sufficiently serious that you, in consultation with your attorney, decided to sue your company for $500,000. Your company’s insurance provider has offered to settle this suit with you out of court. If you decide to reject the settlement and go to court, your attorney is confident that you will win the case but is uncertain about the amount the court will award you in damages. He has provided his assessment of the probability distribution of the court’s award to you in the file P06_45.xlsx. In addition, there are extra legal fees of $10,000 you will have to pay if you go to court.
Let S be the insurance provider’s proposed out-of-court settlement (in dollars). For which values of S will you decide to accept the settlement? For which values of S will you choose to take your chances in court? Assume that you are seeking to maximize the expected net payoff from this litigation.