The decisions of aircraft makers to invest in designing new models can be modele

ID: 1122924 • Letter: T

Question

The decisions of aircraft makers to invest in designing new models can be modeled as a simultaneous move game. Suppose Airbus decides to develop either a jumbo jet or a mid-size jet while Boeing decides to develop a wide body jet or narrow body jet.

If Airbus develops a jumbo jet and Boeing develops a narrow body jet, then Airbus would earn $450 million and Boeing would earn $900 million.

If Airbus develops a jumbo jet and Boeing develops a wide body jet, then Airbus would earn $450 million and Boeing would earn $900 million.

If Airbus develops a mid-size jet and Boeing develops a narrow body jet, then Airbus would earn $300 million and Boeing would earn $950 million.

If Airbus develops a mid-size jet and Boeing develops a wide body jet, then Airbus would earn $350 million and Boeing would earn $850 million.

What is the Nash equilibrium of this simultaneous move game?

A: Airbus develops a mid-size jet, Boeing develops a narrow-body jet

B: Airbus develops a mid-size jet, Boeing develops a wide-body jet

C: Airbus develops a jumbo jet, Boeing develops a wide-body jet

D: Airbus develops a jumbo jet, Boeing develops a narrow-body jet

Explanation / Answer

Answer:

We have the following information

If Airbus develops a jumbo jet and Boeing is indifferent in developing a narrow body jet or a wide body jet, then because in both the case, Boeing would earn $900 million. If Airbus develops a mid-size jet, Boeing must develop a narrow body jet, and earn a higher payoff of $950 million.

Boeing

Airbus

Narrow

Wide

Jumbo

(450, 900)

Mid size

(300, 950)

(350, 850)

Airbus has a dominant strategy of making a Jumbo jet irrespective of what Boeing does. With that strategy Boing is indifferent so it wil produce any of them. Option B