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.
(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.