An oil company, Pritish Betroleum, henceforth PB, has been found guilty of causing a major environmental disaster, and the court has decided that it has to pay an amount X in punitive damages. The exact amount of X will be determined after an assessment of the damages, which will be undertaken by one of two envi- ronmental laboratories, a or b. Under laboratory i, the probability distribution for X is Fi, for i = a,b.
Assume that PB is an expected utility maximizer and that its cardinal utility index is increasing in the company's wealth.
- Suppose that Fa >1 Fb and that the court allows PB to choose which laboratory to use for the assessment of damages. Which one should they choose?
- Suppose now that Fa is the uniform distribution over some interval [x?, x?], while Fb is the uniform distribution over [x? - 1, x? + 1]. Argue that Fa >2 Fb.
- Under the same assumptions as in part 2, suppose that the court allows PB to choose which laboratory to use for the assessment of damages. Which one should they choose?