Consider the Boeing-Airbus game shown below. The numbers indicate the potential

Question

Consider the Boeing-Airbus game shown below. The numbers indicate the potential profit/ loss (€ billion) from developing a ‘mega-carrier’ passenger jet, depending on what the rival does.


                                                                    AIRBUS
 BOEING                                                        Produce                                  Don’t produce 

Produce                                                         -10, -10                                              50, 0
Don’t produce                                                  0, 50                                                  0, 0                                   

i) Calculate the minimum government subsidy to Airbus that will ensure that Airbus will develop the mega-carrier. Explain.




ii) Suppose that the European Union provides Airbus with a subsidy of € 15 billion. Is there any level of subsidy given by the US government that would deter Airbus from developing this airplane? Explain.

Explanation / Answer

Currently, NE is comparing payoffs for each player

                                                                       produce                        Don’t produce

Produce                                                         -10, -10                             50, 0
Don’t produce                                                  0, 50                                0, 0  

In this case, there are two NE of (dont produce produce) and (produce dont produce)

For our first question, we need to calculate the minimum government subsidy to Airbus that will ensure that Airbus will develop the mega-carrier In other words, they will need a subsidy to prevent the NE outcome (prduce dont produce). If the government gave boeing 10 if they produced this would cause our game to look like this. This would leave Airbus indifferent about purchasing the aircraft. However, if the subsidy was any amount over 10, Airbus would have a dominant strategy to produce. Therefore, our answer is the subsidy needs to be greater than 10.

                                                                       produce                        Don’t produce

Produce                                                         -10, 0                             50, 0
Don’t produce                                                 0, 50                                0, 0

For our second question, we need to determine if there any level of subsidy given by the US government that would deter Airbus from developing this airplane if Boeing received a 15 subsidy. We again, set up our game. In this case, if the US gave Boeing a sunsidy greater than 50, they would have a dominant strategy to not produce, and the outcome would never be (produce produce)

                                                                       produce                        Don’t produce

Produce                                                          5, -10                            50, 0
Don’t produce                                               0, 50                                0, 0

Hope this helps

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