1. In a tort suit, the defendant has been found liable. However, the amount of damages to be awarded has not yet been settled. At this point, prior to hearing evidence about the amount of the plaintiff's harm, the defendant does not know whether the plaintiff can prove a high amount of harm or a low amount of harm. The defendant knows if the plaintiff can prove high harm, she will be awarded a judgment of $30,000. Otherwise, the plaintiff can prove low harm and be awarded $10,000 in damages. The defendant believes the probability of each outcome is 50%. You can assume that the plaintiff knows the amount of her harm and can accurately predict the outcome of the damages phase of the trial (she knows with 100% certainty her level of harm)
Continuing the trial through the damages phase will cost each party $5,000. Both parties know the other's legal costs. A settlement doesn't cost anything.
A. Will the defendant make a settlement offer? If so, what amount?
B. Would a low-harm plaintiff accept? Would a high-harm plaintiff?
C. (Bonus) Suppose the defendant could spend $4,000 prior to making a settlement offer to learn the exact level of harm the plaintiff suffered. Would it pay the defendant to acquire the information?