This question seems to have been answered before, but I do not understand the solution.

2. Exit: A large and a small rm A, B in a dying industry face declining inverse demand p(Q,t) = 10 Q t in periods t = 1, 2,3, . . .. Firms have capacities [CA 2 4, k3 = 2 and each rm produces at full capacity with marginal costs 0 = 2.5 as long as it stays in the market. In each period, rms simultaneously decide whether or not to exit. After exiting, a rm cannot reenter the market. The game ends when both rms have exited the game. Either rm aims to maximize the (non-discounted) sum of its prots until its exit. (a) When do rms A and B exit in the unique subgame perfect equilibrium? (Hint: First establish at what time t prots turn negative as a function of the remaining rms, and then argue with generalized backward induction) (b) Now assume that the small rm, B, is credit-constrained and is forced to exit in period t if its prots were negative in t 1. Show that now there exists a different subgame perfect equilibrium where rm B exits before rm A