Airbus and Boeing are the two largest producers of commercial aircraft in the world. They are each trying to determine whether or not they should build an ultra-large passenger plane. They have both decided that building such a plane would be profitable, but only if one of them produces it. The market is simply not large enough for them to both make profits selling this new plane. Consequently, if they both produce the plane, each will lose $10 billion. If only one of them produces, that firm will make $50 billion. Regardless of what the other does, if they choose not to produce the plane, they neither make nor lose money. a. Construct the normal or strategic form of this game and find the pure strategy NE. b. Airbus is a corporation in the European Community while Boeing is an American corporation. The EC has a long history of subsidizing Airbus as well as other man- ufacturers it deems important. Let us remodel this game assuming that the EC tells Airbus that if Airbus produces the plane, the EC will give Airbus $15 billion in sub- sidies. Find pure strategy NE of this modified game. What would happen if the US countered by offering Boeing a similar subsidy? Use this model to explain the effect government subsidies can have on international trade and why? Are such subsidies a "good" thing?
Airbus and Boeing are the two largest producers of commercial aircraft in the world. They are each trying to determine whether or not they should build an ultra-large passenger plane. They have both decided that building such a plane would be profitable, but only if one of them produces it. The market is simply not large enough for them to both make profits selling this new plane. Consequently, if they both produce the plane, each will lose $10 billion. If only one of them produces, that firm will make $50 billion. Regardless of what the other does, if they choose not to produce the plane, they neither make nor lose money. a. Construct the normal or strategic form of this game and find the pure strategy NE. b. Airbus is a corporation in the European Community while Boeing is an American corporation. The EC has a long history of subsidizing Airbus as well as other man- ufacturers it deems important. Let us remodel this game assuming that the EC tells Airbus that if Airbus produces the plane, the EC will give Airbus $15 billion in sub- sidies. Find pure strategy NE of this modified game. What would happen if the US countered by offering Boeing a similar subsidy? Use this model to explain the effect government subsidies can have on international trade and why? Are such subsidies a "good" thing?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Airbus and Boeing are the two largest producers of commercial aircraft in the world. They
are each trying to determine whether or not they should build an ultra-large passenger
plane. They have both decided that building such a plane would be profitable, but only if
one of them produces it. The market is simply not large enough for them to both make
profits selling this new plane. Consequently, if they both produce the plane, each will lose
$10 billion. If only one of them produces, that firm will make $50 billion. Regardless of
what the other does, if they choose not to produce the plane, they neither make nor lose
money.
a. Construct the normal or strategic form of this game and find the pure strategy NE.
b. Airbus is a corporation in the European Community while Boeing is an American
corporation. The EC has a long history of subsidizing Airbus as well as other man-
ufacturers it deems important. Let us remodel this game assuming that the EC tells
Airbus that if Airbus produces the plane, the EC will give Airbus $15 billion in sub-
sidies. Find pure strategy NE of this modified game. What would happen if the US
countered by offering Boeing a similar subsidy? Use this model to explain the effect
government subsidies can have on international trade and why? Are such subsidies a
"good" thing?
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