Strategic Trade Policies have been successfully used by governments to alter the
ID: 1190066 • Letter: S
Question
Strategic Trade Policies have been successfully used by governments to alter the terms of competition in favor of their domestic companies. Using the game theoretic framework (payoff matrix) provided below, please answer all of the following questions:
- In the case of no subsidy, does either firm have a dominant strategy to produce aircraft? Explain why or why not. In this case, which firm is likely to get the deal? Why?
- Assume the European governments decide to subsidize Airbus production by $20 million as illustrated in the second payoff matrix. How is the outcome changed? Specifically, what will Airbus choose to do? What will Boeing choose to do?
- Provide a critique of Strategic Trade Policy. Be sure to cite and explain at least three problems that can arise with pursuing such a policy.
Without Subsidy AIRBUS Produces Does Not Produce 0 Produces Airbus 0 Boeing 100 Airbus (0 Boeing0 Airbus -5 Boein Does Not Produce Airbus 100 Boein With Subsidy AIRBUS Produces Does Not Produce 0 Produces Airbus 15 Boein Airbus 120 Airbus 0 Boeing 100 Airbus 0 Boeing (0 Does Not Produce BoeingExplanation / Answer
1) Case of no subsidy :
Airbus has a dominant strategy : Produce . This is because whatever strategy Boeing chooses , Airbus will always choose to produce . Boing also has a dominant strategy : Produce , for the same reason .
In this case both firms are likely to get the deal since nash equilibrium = ( Produce , Produce ) = ( 5, 5)
2) New Nash Equilibrium : Produces , Produces = 15 , 5 . Boing will still choose to produce since it gives the same payoff 5 . Both will produce again .
Airbus has a dominant strategy to produce . Boeing also has a dominant strategy to produce . Outcome does not change .
3) The outcome does not change but due to subsidy government expenditure rises this can cause inflationa and budget deficit .