Boeing and Airbus are each deciding whether to produce a new aircraft. Because of the huge cost of developing the aircraft, a single producer would need to have the entire world market to itself to earn a profit, say, of $100 million. If both firms produce the aircraft, however, then each loses $10 million. Finally, the payoff for a firm

that does not produce is $0.

A. Show me a two-by-two payoff matrix for the "game" between these two firms, with their choices being to produce or not produce and with payoffs according to the information above. Does either firm have a dominant strategy? If so, indicate who and indicate what the dominant strategy is.

B. Find the Nash equilibrium (equilibria) of the game, and explain why it is (they are) NE. For any NE that exist, what is the total profit realized in the industry?

C. Now suppose that several European governments agree to subsidize Airbus. Specifically, if Airbus produces, it will receive $20 million from these governments regardless of what happens, including whether or not Boeing produces. Re-do your payoff matrix with this subsidy included. Does either firm have a dominant strategy now? If so, indicate who and indicate what the dominant strategy is.

D. Next suppose that the US subsidizes Boeing in exactly the same way as the subsidy for Airbus works. Redo the payoff matrix with both subsidies included. Does either firm have a dominant strategy now? If so, indicate who and indicate what the dominant strategy is. What is the Nash equilibrium to this game? What are the total profits to the industry at this equilibrium? Factoring out the subsidies, what are the total profits at this equilibrium?