28. Suppose that Boeing and Airbus are the only two firms that can produce a par

Question

28. Suppose that Boeing and Airbus are the only two firms that can produce a particular type of aircraft. Each has a choice of producing or not producing it. The payoff matrix is as follows: Possible Strategies for Boeing Possible Strategies for Airbus Produce Do not produce Boeing's profit: $10 million Airbus's profit: -$40 million Boeing's profit: 0 Airbus's profit: $200 million Boeing's profit: $250 million Airbus's profit: 0 Boeing's profit: 0 Airbus's profit: 0 Produce Do not produce Boeing has a head start over Airbus, and can make the first move. a. What will be the outcome? b. Suppose the European governments give Airbus a subsidy of S50 million if it produces the aircraft. What now will be the outcome? c. Will the subsidy discourage Boeing from producing the aircraft?

Explanation / Answer

a) When Boeing has a headstart over Airbus, and can make the first move then outcome will be Boeing will produce and Airbus will not produce. This is because Boeing will get a higher payoff in producing ( 10>0 and 250>0). When Boeing will produce then Airbus will choose to not produce because this will give Airbus higher payoff (0> -40).

b) If the European government gives Airbus a subsidy of $50 million if it produces the aircraft then the outcome will be Both Boeing and Airbus will choose to produce. This is because  Boeing will get a higher payoff in producing ( 10>0 and 250>0). When Boeing will produce then Airbus will choose to produce because this will give Airbus higher payoff ( 10 > 0). Airbus will get a payoff equal to $10(50-40)

c) No the subsidy will not discourage Boeing from producing the aircraft because Boeing still get higher pay off in producing the aircraft.

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