Question

Strategic trade policy Suppose there are only two producers of aircraft in the world, AirCraft in the United States and Air Europa 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 $65 million. If both companies decide to produce, they each lose $3 million. When a company decides not to produce, it earns zero profit.

Answer 1

Answer:

False because when it also produces, both will produce and it will bear a loss of 2 million.

Explanation:

We should change the payoffs to AirEurope when it produces from -2 to 7 when AirCraft produces and from 90 to 99 when AirCraft does not produce. This is because a subsidy is provided when AirEurope produces irrespective of whether its rival produces or not

With the subsidy, regardless of the decision of AirCraft, AirEurope will produce if it desires to maximize its profit. This is because producing is now its dominant strategy.