MEREDITH'S DECISION TREE

0.6
Win

Go to trial 0.5
$1,800,000.00
No Additional Expenses
0.4
Lose
-$1,500,000.00
$1,800,000.00
0.5
Must Pay Court Fees

Settle

Case

Meredith Delgado owns a small firm that has developed software for organizing and playing music on a co
Music Man Software has stolen her ideas and that company’s marketing power is likely to enable it to cap
market and drive Meredith out of business. In response, Meredith has sued Music Man Software for p
infringement. With attorney fees and other expenses, the cost of going to trial (win or lose) is expected t
million. She feels that she has a 60% chance of winning the case, in which case she would receive $5 mi
damages. If she loses the case, she gets nothing. Moreover, if she loses the case, there is a 50% chance t
judge would also order Meredith to pay for court expenses and lawyer fees for Music Man (an addition
million cost). Music Man Software has offered Meredith $1.5 million to settle this case out of court. Const
use a decision tree to determine whether Meredith should go to court or accept the settlement offer, as
she wants to maximize her expected payoff.
 $ 4,000,000.00

dditional Expenses -$1,000,000.00

$1,500,000.00

st Pay Court Fees -$2,000,000.00

$ 1,500,000.00

Answer
So, based on the Decision Tree above, the decision that Meredith
has to choose is "go to trial". Because, it has a higher expected
payoff of $1.800.000,00 than settle, that only has $1.500.000,00 of
ng and playing music on a computer. expected payoff.
er is likely to enable it to capture the
ed Music Man Software for patent
al (win or lose) is expected to be $1
ase she would receive $5 million in
case, there is a 50% chance that the
s for Music Man (an additional $1
this case out of court. Construct and
cept the settlement offer, assuming
ff.