Question

Suppose there are only two producers of aircraft in the world, AirCraft in the United States and AirEurope in the European Union. The following hypothetical payoff matrices show the profits (in millions of dollars) for each company. In the absence of subsidies, if only one company makes aircraft, it receives a profit of $90 million. If both companies decide to produce, they each lose $3 million. When a company decides not to produce, it earns zero profit.

Air Europe
Produce Not produce
Aircraft Produce -3,-3 65,0
Not Produce 0,65 0,0

Suppose that the European Union considers aircraft a strategic industry gives Air-Europe a $9 million subsidy if it produces.
With a $9 million subsidy, regardless of whether Aircraft produces Or not, AirEurope _______produce if it wants to maximize its profit.

Because AirEurope will enter the market if given a $9 million subsidy, AirCraft should also produce in this industry.

a. True
b. False

Answer 1

1. AirEurope should produce if it wants to maximize its profit.

2. False

Step-by-step explanation:

New payoffs after subsidy:

Aircraft/ AirEurope Produce Not Produce

Produce -3 , 6 75 , 0

Not Produce 0 , 74 0 , 0

With a $9 million subsidy, regardless of whether Aircraft produces or not, AirEurope should produce if it wants to maximize its profit.

The statement is false (Aircraft would earn a negative payoff if it enters).