1. Firms A and B are both considering entering a newly opened market. Each has the option of producing a large or a small output, with the resulting payoff possibilities:

Firm B

Large Output Small Output

Large A's profit = 400 A's profit = 900

Output B's profit = 400 B's profit = 750

Firm A

Small A's profit = 800 A's profit = 500

Output B's profit = 1000 B's profit = 500

1. Suppose first that the firms choose simultaneously. Does either firm have a dominant strategy in this game? Briefly explain why or why not.
2. Now suppose instead that Firm A can decide first. Sketch the resulting extensive game. What will be the outcome? Why?