Is the answer a Nash equilibrium and not the other ones? The U.S. producer Boein

Question

Is the answer a Nash equilibrium and not the other ones? The U.S. producer Boeing, and the European Airbus are contemplating the next generation mid-sized fuel efficient generation of air carrier. If both produce their respective models, then each would lose $50 million (because the world market is just not large enough to enable either to capture potential scale economies if they had to share the world market). If neither produce, then each one's net gain would of course be zero. If either one produces while the other does not, then the producer will gain $500 million. Answer questions 4-9 accordingly. loss. nters, it will not be able to cover costs. 5) Which of the following outcomes is a Nash equilibrium? A) Neither company should produce. C) Being should produce and Airbus should not. D) Both companies should produce. E) Both B and C are true. B) Airbus should produce and Boing should not.

Explanation / Answer

If we write down a pay off matrix , considering the above information we can get,

In the above payoff matrix,

In the left column,European Airbus is better off by choosing 0 among -50 and 0

In the right column,European Airbus is better off by choosing 500 among 500 and 0

In the upper row, Boeing is better off by choosing 0 among -50 and 0

In the lower row, Boeing is better off by choosing 500 among 500 and 0

So the Nash equilibrium in pure strategies are : (500,0) and (0,500)

it means, B) Airbus should produce and Boeing not, C) Boieng should produce and Airbus not. This outcomes is a Nash equilibrium .

Ans: E) Both B and C are true.

Boeing Boeing Produced Not produced European Airbus Produced -50,-50 500,0 European Airbus Not produced 0,500 0,0

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