Suppose the production of helicopters is an industry characterized by increasing returns to scale and an Argentine firm,Cicare,is the only player in this market.The firm caters to the global market and earns a profit of $10 million.Flettner,a German firm has been considering entering this market for a while,but it is aware that its entry will cause each firm to lose about $4 million.Although a government subsidy allows Flettner to enter the helicopter market,the company is unable to reap profits in the long run.Which of the following could have led to this outcome?

Question

Quizplus · Accepted Answer

The Argentine government's retaliation by subsidizing Cicare could have prevented Flettner from earning profits in the long run. This could have resulted in a pricing war where both firms maintain low prices, causing losses for both firms. As Flettner was reliant on government subsidies, it may not have been able to sustain these losses and exit the market eventually.

Suppose the Production of Helicopters Is an Industry Characterized by Increasing