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Two airplane manufacturers are considering the production of a new product a 150-passenger jet Both are deciding whether to enter the market and produce the new planes

Two airplane manufacturers are considering the production of a new product, a 150-passenger jet. Both are deciding whether to enter the market and produce the new planes. The payoff matrix is as follows (payoff values are in millions of dollars): The implication of these payoffs is that the market demand is large enough to support only one manufacturer. If both firms enter, both will sustain a loss. a. Identify two possible equilibrium outcomes in this game. b. Consider the effect of a subsidy. Suppose the European Union decides to subsidize the European producer, Airbus, with a check for $25 million if it enters the market. Revise the payoff matrix to account for this subsidy. What is the new equilibrium outcome? c. Compare the two outcomes (pre- and post-subsidy). What qualitative effect does the subsidy have?

May 01 2020 View more View Less

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