Assume that Tudor is risk averse, with square-root utility over its total profit (see Exercise S6),.

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.

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Assume that Tudor is risk averse, with square-root utility over its total profit (see Exercise S6),.
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(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.

 

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