Let us return to a modified version of the court settlement example. You have the
option to settles out of court for $250K. If you go to court, there is a 50% chance
you win and pay $100K and a 50% chance you lose and pay $500K.
Suppose someone says that he can sell you information about your opponent’s
argument. The information is going to be either good news or bad news. The
person says good news happens with probability r if you are going to win the
case, and probability q<r if you are going to lose the case.
a. What is the probability you place on winning the court case if you receive
good news? How about if you receive bad news?
b. How high does r have to be for you to place any value on the information
c. Given r is larger than the value you find in (b), does the value of the signal
depend on r? Why or why not?