Question

Assume that the competition between Boeing and Airbus can be characterized by the following matrix

Airbus Produce Quit Produce -15/ – 5 90/0 Quit 0/140 0/0 Boeing

where the first number in each cell denotes the payoff that Boeing receives and the second number is the payoff that Airbus receives. Assume that Boeing has a first-mover advantage. Then a subsidy of 10 provided to Airbus by the European government will

a) will negatively affect European welfare

b) change nothing

c) result in both firms leaving the market

d) will increase European welfare

Answer 1

Answer option d)

With subsidy, of 10 to airbus, when it Produces,

Then new payoff matrix

B/A	produce	Quit
Produce	(-15,5)	(90,0)
Quit	(0,150)	(0,0)

Boeing moves first

Now with subsidy, Airbus has dominant strategy to produce,

Thus seeing this, Boeing will decide not to produce & Quit

While prior to subsidy, Boeing decides to produce, & airbus will Quit

thus with subsidy, welfare of European Firm airbus rises