ECON 600 - Microeconomic Theory

PART 3 Please show your work and fully annotate all graphs. Simplify your answers only to the extent that it will help you answer the problems. Explain ALL vour answers, unless specified otherwise. Feel free to use a calculator. 3 Suppose that Boeing and Airbus are the two main aircraft manufacturers worldwide. For the sake of simplicity, we assume that each firm has the choice between two strategies: producing a narrow-body aircraft or producing a wide-body aircraft. The pavoffs (1n billion dollars) from each strategy are shown 1n the following payoff matrix. Airbus aircraft aircraft g o Ty " aircraft e a2y aircraft L (a) If both Airbus and Boeing move simultaneously, does either firm have a dominant strategy? (b) Briefly define the concept of Nash equilibrium. What 1z the Nash equilibrium, if any, in this game? () Assume that the US government provides a $10 billion subsidy to Boeing, provided Boeing produces a wide body awrcraft. What 1s the new Nash equilibrium? In this setting, does the subsidy increase US welfare (Hint: 1gnore consumer surplus)? If the subsidy does not improve welfare, why would the government implement 1t7 Explain vour answer in a couple of sentences. (d) Assume now we are back to the game without subsidy. Assume that Boeing has a head start and moves first in this game. What 1s the Nash equilibrium? (e) Assume we are still in the game without subsidy. Let us define p as Boeing's probability of producing a wide-body aircraft and g as Airbus probabality of producing a wide-body atrcraft. What 1s the mixed strategy equilibrium? Boeing