Question

A man is considering bringing a lawsuit against a company. His lawyer estimates that there is a 70% chance he will make $40,000 (after legal fees), 10% chance he will break even (the award will equal the legal fees), and a 20% chance they will lose the case and he will need to pay $40,000 in legal fees.

Estimate his expected gain or loss if he proceeds with the lawsuit.
What is his expected gain or loss?
(Please select one answer below, thank you)
Breaks even
Gain of $20,000
Loss of $20,000

Answer 1

By calculating the expected value of each possible outcome of the lawsuit and adding them together, the man's expected gain from the lawsuit is estimated to be $20,000.

Step-by-step explanation:

To estimate the man's expected gain or loss for proceeding with the lawsuit, we need to multiply each outcome by its respective probability and sum the results.

1. Multiply the gain or loss by the probability of that outcome:
   
   - Gain of $40,000 with a 70% probability: 0.7 x $40,000 = $28,000
   
   - Break even with a 10% probability: 0.1 x $0 = $0
   
   - Loss of $40,000 with a 20% probability: 0.2 x -$40,000 = -$8,000
2. Add the results to find the expected value:
   
   $28,000 + $0 - $8,000 = $20,000

Therefore, the man's expected gain if he proceeds with the lawsuit would be $20,000.