1. Assume that firm B (the potential entrant) assigns probability p (1 > p > 0) to firm As cost being $40 [and probability (1 p) to firm As cost being $60]. Show why (or why not) firm B wants to enter this market if firm A charges $100 in the first stage of the game.

2.

Assume firm B would enter if firm A charges $100 in the first stage of the game. Why would firm A wish to signal to firm B to not enter in the third stage? (Calculate the cost to firm A both types [the HI and the LO cost type of firm A] for firm B entering in the third stage.)

3.

Identify TWO different ways (in the game or in reality) firm A might try to signal to firm B that firm As costs are $40 (LO).

4.

What price could firm A type LO charge in the first stage that would credibly signal to firm Bthat its costs are actually LO ($40)? Show that firm A type HI ($60) would

Not rationally charge that price in the first stage. Show that sending such a signal is net profitable to firm A type LO [i.e., show that the cost of the signal in the first stage is more than made up for by Deterring competition in the third stage].