Assume that Tudor is risk averse, with square-root utility over its total profit (see Exercise S6), and that Fordor is risk neutral. Also, assume that Tudor’s low per-unit cost is 10, as in Section...


Assume that Tudor is risk averse, with square-root utility over its total profit (see Exercise S6), and that Fordor is risk neutral. Also, assume that Tudor’s low per-unit cost is 10, as in Section 6.C.


(a) Redraw the extensive-form game shown in Figure 8.9, giving the proper payoffs for a risk-averse Tudor.


(b) Let the probability that Tudor is low cost, z, be 0.4. Will the equilibrium be separating, pooling, or semiseparating?


(c) Repeat part (b) with z = 0.1.


(d) (Optional) Will Tudor’s risk aversion change the answer to part (d) of Exercise U5? Explain why or why not.




May 26, 2022
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