(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

Question

(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?

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

Quizplus · Accepted Answer

If Boeing takes the subsidy and produces superjumbo jets, its profit will increase by $20 million (from -$10 million to $10 million) in element D. However, Airbus's profit will decrease by $20 million (from $30 million to $10 million) in the corresponding element. Therefore, Airbus's best strategy is to discontinue producing superjumbo jets because its losses are lower than if it produced superjumbo jets.

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