Airline Industry. The jet aircraft industry is dominated by two major competitors: Airbus(denoted by A) and Boeing (denoted by B). Their costs functions are, respectively, ca = 14q andСв = 14q. There are no fixed costs. The total (industry) output is produced by only these twofirms, Q = 9a + 9B, and the inverse demand function for jets by major airlines is estimated to bep = 626 - Q.Suppose that Airbus and Boeing decide simultaneously their production levels.Derive each company's best-response function.How much output will each firm produce?What will the market price be?Compute each company's profit.Suppose that Airbus and Boeing collude. What is the level of production, the market price, and profit per firm? Does collusion benefit the two producers? Compare each firm's profits.Discuss.(a) If Airbus produces the level of output that the companies have agreed upon, will Boeing have incentives to cheat and produce a different level?Calculate the market price and each company's profit in this case.Create the payoff matrix of this game and discuss your results (competition/ collusion/ cheating).

Analyze the situation step-by-step, starting with the Cournot competition framework where both firms…

Answered: Airline Industry. The jet aircraft…

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Chapter1: Making Economics Decisions

Section: Chapter Questions

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Airline Industry. The jet aircraft industry is dominated by two major competitors: Airbus

(denoted by A) and Boeing (denoted by B). Their costs functions are, respectively, ca = 14q and

Св = 14q. There are no fixed costs. The total (industry) output is produced by only these two

firms, Q = 9a + 9B, and the inverse demand function for jets by major airlines is estimated to be

p = 626 - Q.

Suppose that Airbus and Boeing collude. What is the level of production, the market price, and profit per firm? Does collusion benefit the two producers? Compare each firm's profits.

Discuss.

(a) If Airbus produces the level of output that the companies have agreed upon, will Boeing have incentives to cheat and produce a different level?

Calculate the market price and each company's profit in this case.
Create the payoff matrix of this game and discuss your results (competition/ collusion/ cheating).

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