2008BPUB250ProblemSet7

# 2008BPUB250ProblemSet7 - BPUB 250 Spring 2008 Problem Set...

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BPUB 250 Spring 2008 Problem Set 7 (DUE in class on 28/29 April 2008) As usual, assume that any product quantities can be divided into any fractional amount throughout the problem set. 1. Ludo has decided to use some of his time o/ during spring break relaxing in Vancouver and discovering how to use the fancy colorful soda making powder±shaker contraption his friends got him for his birthday. Upon getting a hang for it, Ludo tries to make ice cream soda with bananas. However, something goes which produces the ice cream immediately sues Ludo for stealing their recipe and fraudulently producing the ice cream. Ludo ²gures the probabilities associated with the possible verdicts of the trial are as follows: verdict probability penalty guilty of voluntary banana split ice cream fraud 0 : 6 \$450 ; 000 guilty of involuntary banana split ice cream fraud 0 : 3 \$240 ; 000 innocent 0 : 1 \$0 Thanks to the excellent public defense system in Canada, Ludo is provided with a decent lawyer for free so the trial itself will be costless to him. Ludo has managed to acquire \$490 ; 000 in wealth as a professor, and his utility function for wealth is U ( w ) = p w . The ice cream company is willing to settle with Ludo for \$330 ; 000 in order to avoid the trial. (a) Does Ludo accept the settlement o/er? (b) What is the most Ludo would be willing to pay in a settlement in order to avoid going to trial? (c) Ludo³s lawyer happens to know the former president of the U.S., an old supermarket worker whose shocking climb to the presidency and radical price support programs were both much celebrated and debated. The ex-president is willing to take the stand in Ludo³s trial and testify that it is absolutely impossible that anybody would ever voluntarily fraudulently, given how horrible it tastes. If the testimony is heard, it will completely eliminate the possibility of Ludo being charged with voluntary fraud, changing the verdict probabilities to verdict probability penalty guilty of involuntary banana split ice cream fraud 0 : 8 \$240 ; 000 innocent 0 : 2 \$0 There is a catch, however. The ex-president will only appear in court if paid a fee of dollars by Ludo, since he would have to take a break from his lucrative corporate speech tour. The settlement

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2008BPUB250ProblemSet7 - BPUB 250 Spring 2008 Problem Set...

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