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Rising Star
Tell shop 2 you’re in the final stages of talking to shop 1. This is not uncommon. They will know to cut the red tape and speed things up if they want you.
Then, when you get a written offer from shop 1 it will come with a time limit. If you’re still interested in shop 2, tell them that time limit, and they’ll rush you and offer by the end of it.
Don’t tell shop 1 you’re talking to shop 2. (Unless you’re trying to leverage a better from shop 1 using an offer from shop 2, which isn’t the case.)
Rising Star
No, it makes it look like you’re having doubts about working with them. Think about it like dating (before you’re exclusive.) Its okay to say “I met someone else, and can no longer see you.” But it’s weird to say “I met someone else, and am going to decide whether to see them or you.”
It’s hard to learn these unwritten rules!
let them know. You can even use the other offer to get a bump. I once honestly told one agency "i am going to come work for you no matter what, but I'd appreciate if you can match this offer" and they did.