The U.S. producer Boeing, and the European Airbus are contemplating the next generation mid-sized fuel efficient generation of air carrier. If both produce their respective models, then each would lose $50 million (because the world market is just not large enough to enable either to capture potential scale economies if they had to share the world market). If neither produce, then each one's net gain would of course be zero. If either one produces while the other does not, then the producer will gain $500 million.
(a)What is the correct strategy for either company?
(b)What is the correct strategy for a government seeking to maximize national economic welfare?
(c)If a national government decides to subsidize its aircraft producer, how high should be the subsidy?

Question

Quizplus · Accepted Answer

The Answer of The U.S. producer Boeing, and the European Airbus are contemplating the next generation mid-sized fuel efficient generation of air carrier. If both produce their respective models, then each would lose $50 million (because the world market is just not large enough to enable either to capture potential scale economies if they had to share the world market). If neither produce, then each one's net gain would of course be zero. If either one produces while the other does not, then the producer will gain $500 million.
(a)What is the correct strategy for either company?
(b)What is the correct strategy for a government seeking to maximize national economic welfare?
(c)If a national government decides to subsidize its aircraft producer, how high should be the subsidy?

The US Producer Boeing, and the European Airbus Are Contemplating the the Next