Suppose there are only two producers of aircraft in the worl

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 $100 million. If both companies decide to produce, they each lose $5 million. When a company decides not to produce, it earns zero profit. Suppose that the European Union considers aircraft a strategic industry and gives AirEurope a $10 million subsidy if they produce. Fill it the cells of the following payoff matrix to reflect the subsidy. With a $10 million subsidy, if AirEurope produces, it is guaranteed a _____ of at least . In this case, if Aircraft decides to produce, it will incur a_______ of . However, if AirCraft decides against launching its new product, AirEurope\'s_____ will be . Assuming that the two companies produce entirely for export, the subsidy results in a transfer of in______ from ______to______.

Solution

It is so because subsidy is given only when a firm continues production.

with a $10 million subsid, if AirEuro produces, it is guaranteed a profit of atleast $5. In this case, if Aircraft decides to produce, it will incur a loss of -5. However, if Aircraft decides against launching its new prodcut, AirEurope\'s profit will be $110.

Assuming that two companies produce entirely for exports, the subsidy results in a transfer of production from AirEurope to USA.

	Air Europe
Air Craft	Produce	Not Produce
Produce	5 (-5+10),-5,	0,100
Not Produce	110,0	0,0