Question 1

Explain how the firm decides on the optimal amount of research and development.

Accepted Answer

A firm’s optimal level of R&D expenditur

Question 2

Industry A has a 60 percent concentration ratio, while industry B has a 40 percent concentration ratio. According to the inverted-U theory, all else equal, we can conclude that

Accepted Answer

A) industry A will be more technologically progressive than B. 
B) industry C, with a 10 percent concentration ratio, will be more technologically progressive than either industry A or B. 
C) industry D, with an 80 percent concentration ratio, will be more technologically progressive than either industry A or B. 
D) industry A and industry B should have similar amounts of R&D spending, all else equal. 
A) industry A will be more technologically progressive than B. 
B) industry C, with a 10 percent concentration ratio, will be more technologically progressive than either industry A or B. 
C) industry D, with an 80 percent concentration ratio, will be more technologically progressive than either industry A or B. 
D) industry A and industry B should have similar amounts of R&D spending, all else equal.

Question 3

Creative destruction is the situation where the creation of new products destroys the monopoly market positions of firms producing existing products.

Accepted Answer

A) True 
 B)False

Question 4

The table shows the rate of return and R&D spending for a hypothetical firm. Assume the interest-rate cost of funds is 8 percent. What is the optimal amount of R&D expenditures?

Accepted Answer

A) $24 billion 
B) $30 billion 
C) $36 billion 
D) $42 billion 
A) $24 billion 
B) $30 billion 
C) $36 billion 
D) $42 billion

Question 5

Patent trolls

Accepted Answer

A) enhance efficiency by shortening the effective life of a patent. 
B) harm firms' sales by posting negative product comments on social media. 
C) invent nothing and produce nothing, but collect royalties through patent ownership. 
D) are particularly problematic in the pharmaceutical industry. 
A) enhance efficiency by shortening the effective life of a patent. 
B) harm firms' sales by posting negative product comments on social media. 
C) invent nothing and produce nothing, but collect royalties through patent ownership. 
D) are particularly problematic in the pharmaceutical industry.

Question 6

Assume that a firm's interest-rate cost-of-funds curve for R&D is perfectly elastic. Which of the following would decrease a firm's optimal R&D expenditures and, in equilibrium, increase the expected rate of return on the last dollar of R&D?

Accepted Answer

A) a rightward shift of the expected-rate-of-return curve 
B) an upward shift of the interest-rate cost-of-funds curve 
C) a leftward shift of the expected-rate-of-return curve 
D) a downward shift of the interest-rate cost-of-funds curve 
A) a rightward shift of the expected-rate-of-return curve 
B) an upward shift of the interest-rate cost-of-funds curve 
C) a leftward shift of the expected-rate-of-return curve 
D) a downward shift of the interest-rate cost-of-funds curve

Question 7

Diffusion is the first successful commercial introduction of a product, the use of a new method, or the creation of a new form of business enterprise.

Accepted Answer

A) True 
 B)False

Question 8

Imitation by rivals tends to enhance the profits of the innovating firms.

Accepted Answer

A) True 
 B)False

Question 9

The two types of innovation are product innovation and

Accepted Answer

A) resource innovation. 
B) market innovation. 
C) process innovation. 
D) financial innovation. 
A) resource innovation. 
B) market innovation. 
C) process innovation. 
D) financial innovation.

Question 10

Why do entrepreneurs and other innovators actively study the scientific output of universities and government laboratories?

Accepted Answer

Scientific principles cannot be patented

Question 11

In the diagram, at $10 million of R&D expenditure, the

Accepted Answer

A) expected rate of return exceeds the interest-rate cost of funds. 
B) firm is spending an optimal amount on R&D. 
C) interest-rate cost of funds exceeds the expected rate of return. 
D) marginal benefit of R&D is less than the marginal cost of R&D. 
A) expected rate of return exceeds the interest-rate cost of funds. 
B) firm is spending an optimal amount on R&D. 
C) interest-rate cost of funds exceeds the expected rate of return. 
D) marginal benefit of R&D is less than the marginal cost of R&D.

Question 12

Define invention. What does government do to protect it?

Accepted Answer

Invention is the conception of a new pro

Question 13

If we plotted the given data on a graph with R&D expenditures on the horizontal axis, the

Accepted Answer

A) interest-rate cost-of-funds curve would be a vertical line. 
B) interest-rate cost-of-funds curve would slope downward. 
C) expected-rate-of-return curve would slope downward. 
D) expected-rate-of-return curve would be a horizontal line. 
A) interest-rate cost-of-funds curve would be a vertical line. 
B) interest-rate cost-of-funds curve would slope downward. 
C) expected-rate-of-return curve would slope downward. 
D) expected-rate-of-return curve would be a horizontal line.

Question 14

The table shows the marginal utility schedules for old product X and new product Y for a hypothetical consumer. The price of X is $4, and the price of good Y is $3. The budget of the consumer is $18. When the consumer purchases the utility-maximizing combination of old product X and new product Y, total utility will be

Accepted Answer

A) 78. 
B) 64. 
C) 60. 
D) 70. 
A) 78. 
B) 64. 
C) 60. 
D) 70.

Question 15

In the graph, the difference between points d and e indicates that at $50M of R&D spending, the

Accepted Answer

A) marginal cost is greater than the marginal benefit. Thus, R&D spending should be reduced. 
B) marginal cost is less than the marginal benefit. Thus. R&D spending should be reduced. 
C) marginal cost is greater than the marginal benefit. Thus, R&D spending should be increased. 
D) marginal cost is less than the marginal benefit. Thus, R&D spending should be increased. 
A) marginal cost is greater than the marginal benefit. Thus, R&D spending should be reduced. 
B) marginal cost is less than the marginal benefit. Thus. R&D spending should be reduced. 
C) marginal cost is greater than the marginal benefit. Thus, R&D spending should be increased. 
D) marginal cost is less than the marginal benefit. Thus, R&D spending should be increased.

Question 16

Assume that a firm's interest-rate cost-of-funds curve for R&D is perfectly elastic. Which of the following would increase a firm's optimal R&D expenditures and, in equilibrium, leave the expected rate of return on the last dollar of R&D unchanged?

Accepted Answer

A) a rightward shift of the expected-rate-of-return curve 
B) an upward shift of the interest-rate cost-of-funds curve 
C) a leftward shift of the expected-rate-of-return curve 
D) a downward shift of the interest-rate cost-of-funds curve 
A) a rightward shift of the expected-rate-of-return curve 
B) an upward shift of the interest-rate cost-of-funds curve 
C) a leftward shift of the expected-rate-of-return curve 
D) a downward shift of the interest-rate cost-of-funds curve

Question 17

As pizza topped with barbecue chicken became popular at specialty restaurants, Pizza Hut and Papa John's introduced a similar pizza. This imitation illustrates

Accepted Answer

A) innovation. 
B) invention. 
C) creative destruction. 
D) diffusion. 
A) innovation. 
B) invention. 
C) creative destruction. 
D) diffusion.

Question 18

The marginal cost-of-funds curve for a firm shows the

Accepted Answer

A) interest rate that a firm must pay for additional funding. 
B) rate of return that a firm gets from its investment projects. 
C) amount of funds available to a firm for its investments. 
D) sources of funds that a firm has for its various projects. 
A) interest rate that a firm must pay for additional funding. 
B) rate of return that a firm gets from its investment projects. 
C) amount of funds available to a firm for its investments. 
D) sources of funds that a firm has for its various projects.

Question 19

Assume that a consumer purchases a combination of products. Product A is an old and reliable product. Product B is a new and appealing product. The MUₐ /Pₐ = 15 and MUᵦ /Pᵦ = 10. To maximize utility without spending more money, the consumer should

Accepted Answer

A) purchase less of B and more of A. 
B) purchase more of A and less of B. 
C) purchase more of both A and B. 
D) make no change in A and B. 
A) purchase less of B and more of A. 
B) purchase more of A and less of B. 
C) purchase more of both A and B. 
D) make no change in A and B.

Question 20

In the graph, the expected-rate-of-return curve would be the line connecting points

Accepted Answer

A) a, c, and e. 
B) b, c, and e. 
C) b, c, and d. 
D) a, c, and d. 
A) a, c, and e. 
B) b, c, and e. 
C) b, c, and d. 
D) a, c, and d.

Exam 15: Technology, RD, and Efficiency

Explain how the firm decides on the optimal amount of research and development.

Industry A has a 60 percent concentration ratio, while industry B has a 40 percent concentration ratio. According to the inverted-U theory, all else equal, we can conclude that

Creative destruction is the situation where the creation of new products destroys the monopoly market positions of firms producing existing products.

The table shows the rate of return and R&D spending for a hypothetical firm. Assume the interest-rate cost of funds is 8 percent. What is the optimal amount of R&D expenditures?

Patent trolls

Assume that a firm's interest-rate cost-of-funds curve for R&D is perfectly elastic. Which of the following would decrease a firm's optimal R&D expenditures and, in equilibrium, increase the expected rate of return on the last dollar of R&D?

Diffusion is the first successful commercial introduction of a product, the use of a new method, or the creation of a new form of business enterprise.

Imitation by rivals tends to enhance the profits of the innovating firms.

The two types of innovation are product innovation and

Why do entrepreneurs and other innovators actively study the scientific output of universities and government laboratories?

In the diagram, at $10 million of R&D expenditure, the

Define invention. What does government do to protect it?

If we plotted the given data on a graph with R&D expenditures on the horizontal axis, the

In the graph, the difference between points d and e indicates that at $50M of R&D spending, the

Assume that a firm's interest-rate cost-of-funds curve for R&D is perfectly elastic. Which of the following would increase a firm's optimal R&D expenditures and, in equilibrium, leave the expected rate of return on the last dollar of R&D unchanged?

As pizza topped with barbecue chicken became popular at specialty restaurants, Pizza Hut and Papa John's introduced a similar pizza. This imitation illustrates

The marginal cost-of-funds curve for a firm shows the

Assume that a consumer purchases a combination of products. Product A is an old and reliable product. Product B is a new and appealing product. The MUₐ /Pₐ = 15 and MUᵦ /Pᵦ = 10. To maximize utility without spending more money, the consumer should

In the graph, the expected-rate-of-return curve would be the line connecting points

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

Elasticity

Utility Maximization

Behavioral Economics

Businesses and the Costs of Production

Pure Competition in the Short Run

Pure Competition in the Long Run

Pure Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

The Demand for Resources

Wage Determination

Rent, Interest, and Profit

Natural Resource and Energy Economics

Public Finance: Expenditures and Taxes

Antitrust Policy and Regulation

Agriculture: Economics and Policy

Income Inequality, Poverty, and Discrimination

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The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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