Use the table below that shows the rate of return and R&D spending for a hypothetical firm. Assume the interest-rate cost of funds is 6%. Expected rate of return (%) R&D (millions of $) 15 0 12 10 9 20 6 30 3 40 (a)Graph the marginal cost and marginal benefit curves of R&D spending in the graph below. Be sure to label the axes. What is the optimal level of R&D spending? (b)Now assume that the interest-rate cost of funds is 9%. Show on the graph what happens to the interest-rate cost of funds curve. What is the optimal level of R&D spending?
Use the table below that shows the rate of return and R&D spending for a hypothetical firm. Assume the interest-rate cost of funds is 6%. Expected rate of return (%) R&D (millions of $) 15 0 12 10 9 20 6 30 3 40 (a)Graph the marginal cost and marginal benefit curves of R&D spending in the graph below. Be sure to label the axes. What is the optimal level of R&D spending? (b)Now assume that the interest-rate cost of funds is 9%. Show on the graph what happens to the interest-rate cost of funds curve. What is the optimal level of R&D spending?
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter7: Production, Costs, And Industry Structure
Section: Chapter Questions
Problem 22RQ: What are diminishing marginal returns as they relate to costs?
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22.Use the table below that shows the
|
Expected rate of return (%) |
R&D (millions of $) |
|
15 |
0 |
|
12 |
10 |
|
9 |
20 |
|
6 |
30 |
|
3 |
40 |
(a)Graph the marginal cost and marginal benefit curves of R&D spending in the graph below. Be sure to label the axes. What is the optimal level of R&D spending?
(b)Now assume that the interest-rate cost of funds is 9%. Show on the graph what happens to the interest-rate cost of funds curve. What is the optimal level of R&D spending?
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