Question

Two airplane manufacturers are considering the production of a new product, a 150-passenger jet. Both are deciding whether to enter the market and produce the new planes. The payoff matrix is as follows (payoff values are in millions of dollars):
Airbus
Produce Don't Produce
Boeing Produce -5 for each 100 for Boeing, 0 for Airbus
Don't Produce 0 for Boeing,100 for Airbus 0 for each
The implication of these payoffs is that the market demand is large enough to support only one manufacturer. If both firms enter, both will sustain a loss.
Identify two possible equilibrium outcomes below in this game.
i. Boeing produces and Airbus does not.
ii. Airbus produces and Boeing does not.
iii. Both Airbus and Boeing produce.
iv. Neither Airbus nor Boeing produce.
Statements:
a) iii and iv
b) ii and iii
c) i and ii
d) i and iii are true.

Answer 1

Answer:

c) i and ii

Explanation:

Game theory looks at the interactions between participants in a competitive game and calculates the best choice for the player.

Dominant strategy is the best option for a player regardless of what the other player is playing.

Nash equilibrium is the best outcome for a player where no player has an incentive to change their decisions.

In this game, if both firms enter the market, they would both earn losses.

If one firm enters the market and the other doesn't, the firm that enters the market makes a profit of 100 while the other firm enters nothing

If both firms don't enter the market, they both earn nothing.

So, the possible equilibrium position is for one firm to enter the industry and for the other firm not to.

I hope my answer helps you