(Scenario: Payoff Matrix for Airbus and Boeing) This Payoff Matrix

question 118

Multiple Choice

(Scenario: Payoff Matrix for Airbus and Boeing) This payoff matrix describes actions in developing so-called superjumbo jets that can carry 600 or more passengers. In each element, the lower-left value gives the outcome for Boeing based on the action of Airbus and the upper-right value gives the outcome for Airbus based on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to produce superjumbo jets.

Now suppose that the U.S. government decides to provide a $50 million subsidy to Boeing to encourage it to produce superjumbo jets. Boeing decides to take the subsidy. Using the payoff matrix, what is Airbus's best strategy?

• A) continue to produce superjumbo jets because its profits will not be affected
• B) continue to produce superjumbo jets even though its profits will fall
• C) discontinue producing superjumbo jets because its losses are lower than if it produced superjumbo jets
• D) discontinue producing superjumbo jets because it would neither lose nor earn more profits by producing superjumbo jets

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Definitions:

Government Regulation

Rules and guidelines established by the government aimed at influencing or controlling certain activities within the society or economy.

Total Surplus

The total net gain to society from a market transaction, which is the combination of consumer surplus and producer surplus.

Consumer Surplus

The gap between the aggregate amount buyers are willing and able to spend for a good or service, versus what they actually spend.

Property Rights

The legally guaranteed rights to own, use, and dispose of assets, including physical and intellectual property.