Looking at Tudor and Fordor again, assume that the old,
established company Tudor is risk averse, whereas the would-be entrant Fordor
(which is planning to finance its project through venture capital) is risk
neutral. That is, Tudor’s utility is always the square root of its total profit
over both periods. Fordor’s utility is simply the amount of its profit—if
any—during the second period. Assume that Tudor’s low per-unit cost is 5, as in
(b) Let the probability that Tudor is low cost, z, be
0.4. Will the equilibrium be separating, pooling, or semi separating?
(c) Repeat part (b) with z 5 0.1.