Is the subsidy a good investment on the part of the govts

Reference no: EM13222600

Boeing and Airbus compete in the airliner business. The next generations of jets are being designed, but neither company knows whether they will receive government subsidies to produce the jets. Boeing and Airbus view the strategic choices as follows with the profits they can expect with or without $400M subsidies from their respective governments:
Airbus
No subsidy (0.5) Subsidy (0.5)
Boeing No subsidy (0.5) $100M , $100M $-200M , $500M
Subsidy (0.5) $500M , $-200M $300M , $300M

Reading the table example: If Boeing proceeds without subsidy and Airbus receives the subsidy, Boeing loses $200M and Airbus has $500M profits. Assume a 1-year project with no time value of money and all development costs are sunk.
Boeing believes there is a 50% chance that either government will grant the subsidy, and that the subsidy decision will be made simultaneously and independently, with no collusion between governments. Boeing must invest in the project before they know if the subsidy will be granted.
A. Should Boeing invest? Why or why not?
B. What is the value to Boeing of having a spy within the French government (but not the U.S. government) who can tell them before they commit to the program if Airbus will receive a subsidy? (Give the expected dollar value, ignoring ethical or legal liability concerns.)
C. Is the subsidy a good investment on the part of the respective governments?

Reference no: EM13222600

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