Assume Boeing Inc.(of the United States) and Airbus Industrie (of Europe) rival for monopoly profits in the Canadian aircraft market.Suppose the two firms face identical cost and demand conditions,as seen in Figure 6.1.
Figure 6.1.Strategic Trade Policy: Boeing versus Airbus

-Referring to Figure 6.1,the Airbus subsidy leads to a (an) increase/decrease in Canadian consumer surplus of $____,as compared to the consumer surplus that existed in the absence of a subsidy.

Question

Assume Boeing Inc.(of the United States) and Airbus Industrie (of Europe) rival for monopoly profits in the Canadian aircraft market.Suppose the two firms face identical cost and demand conditions,as seen in Figure 6.1.
Figure 6.1.Strategic Trade Policy: Boeing versus Airbus
 
-Referring to Figure 6.1,the Airbus subsidy leads to a (an) increase/decrease in Canadian consumer surplus of $____,as compared to the consumer surplus that existed in the absence of a subsidy.

Quizplus · Accepted Answer

In Figure 6.1, the original equilibrium is at point A, where the price is P1 and the quantity demanded and supplied is Q1. If Airbus receives a subsidy, its marginal cost decreases and the supply curve shifts downward to S1. At the new equilibrium point B, both Boeing and Airbus produce at a larger quantity Q2, and the price decreases to P2.

As a result, Canadian consumers benefit from a larger consumer surplus. The increase in consumer surplus is shown by the area of the triangle P1CP2, which is $10 million. Therefore, the correct answer is B) Increase of $10 million.