Question 1

Explain the reasoning behind the inverted-U theory of R&D expenditures.

Accepted Answer

The inverted-U theory of R&D is the idea...

Question 2

The profit-enhancing impact of product innovation tends to be on all of the following, except

Accepted Answer

A)  the firm's revenues.
B)  the buyers' utility derived from the product.
C)  the firm's cost of production.
D)  the attractiveness of the product to buyers.E) B) and C)
F) C) and D) C

Question 3

R&D spending decisions are complicated because

Accepted Answer

A)  costs of R&D are immediate, while benefits occur at some future time and are uncertain.
B)  benefits of R&D are clear, but costs are complicated and hard to estimate.
C)  there are so many different sources of funds for R&D, and they each require different returns.
D)  it is difficult to determine which R&D activities could be patented.E) A) and D)
F) None of the above

Question 4

The profit-enhancing impact of process innovation tends to be on all of the following, except

Accepted Answer

A)  the firm's TP or MP curves.
B)  the firm's MR curve.
C)  the firm's cost curves.
D)  the firm's productivity.E) None of the above
F) A) and B)

Question 5

Refer to the data. At $20 million of R&D expenditures, the

Accepted Answer

A)  marginal cost of R&D exceeds the marginal benefit.
B)  expected total return from R&D is at a maximum.
C)  interest-rate cost of funds is negative.
D)  marginal benefit of R&D exceeds the marginal cost.E) None of the above
F) B) and C)

Question 6

The first discovery of the water-soluble material used in contact lenses is an example of

Accepted Answer

A)  innovation.
B)  invention.
C)  creative destruction.
D)  diffusion.E) A) and B)
F) C) and D) B

Question 7

Which of the following statements does not apply when a firm's rivals imitate its innovation.

Accepted Answer

A)  It tends to reduce the originator's profits
B)  It enhances the innovator's returns to its R&D expenditures.
C)  It is often the path to widespread diffusion of the innovation.
D)  It helps other firms incorporate innovative features into their own operations.E) None of the above
F) B) and C)

Question 8

A profit-maximizing firm should not undertake an R&D project for which the

Accepted Answer

A)  expected rate of return exceeds its interest-rate cost of funds.
B)  interest-rate cost of funds exceeds the expected rate of return.
C)  expected returns are in the distant future.
D)  expected returns, though potentially very large, are uncertain.E) None of the above
F) A) and D)

Question 9

Large, well-established firms are more likely to use retained earnings to finance R&D, while small start-up firms are more likely to rely on venture capital.

Accepted Answer

A) True 
 B)False

Question 10

The interest-rate cost-of-funds curve is perfectly elastic because firms can borrow as much or as little as they want at market interest rates.

Accepted Answer

A) True 
 B)False

Question 11

According to the inverted-U theory of R&D, other things equal, firms in industries with concentration ratios around 10 percent will be more technologically progressive than firms in industries with 50 percent concentration ratios.

Accepted Answer

A) True 
 B)False

Question 12

Violin strings made from sheep intestines were first called "catgut" because

Accepted Answer

A)  at the time, it was thought to be extremely unlucky to kill sheep.
B)  the inventor wanted to establish a legally protected brand name.
C)  the inventor wanted to preserve his trade secret.
D)  the inventor thought that "catgut" would sound less offensive to buyers than "sheep intestines."E) A) and B)
F) All of the above

Question 13

The table shows the marginal utilities derived from current consumption levels of three new products, A, B, and C, that are being sold in the market at the prices listed. The consumer can immediately gain the most extra total utility by switching spending from

Accepted Answer

A)  C to A.
B)  A to C.
C)  B to C.
D)  C to B.E) A) and B)
F) A) and C)

Question 14

In analyzing a market, the time horizon where technology can change and firms can offer new products is referred to as the

Accepted Answer

A)  short run.
B)  very short run.
C)  long run.
D)  very long run.E) C) and D)
F) B) and D)

Question 15

The successful commercial introduction of a new product, the use of a new method, or the creation of a new form of business enterprise is called

Accepted Answer

A)  innovation.
B)  invention.
C)  creative destruction.
D)  diffusion.E) A) and D)
F) None of the above A

Question 16

The table shows the expected rate of return, R&D spending, and interest-rate cost-of-funds for a hypothetical firm. Based on the information given, the optimal amount of R&D spending would be

Accepted Answer

A)  $0 million.
B)  $75 million.
C)  $65 million.
D)  $55 million.E) A) and B)
F) A) and C)

Question 17

In general, which of the following is true?

Accepted Answer

A)  The number of firms in the industry is far more important than the industry's scientific character and extent of technological opportunities.
B)  The greater an industry's concentration ratio, the higher are its R&D expenditures in relation to sales.
C)  The industry's scientific character and extent of technological opportunities often are more important than the industry's concentration ratio.
D)  The higher the industry's interest cost of borrowing funds for R&D, the greater is the industry's progressiveness.E) C) and D)
F) A) and B)

Question 18

In the diagram, (1) is the

Accepted Answer

A)  expected-rate-of-return curve, and (2) is the average total cost curve.
B)  total revenue curve, and (2) is the interest-rate cost-of funds-curve.
C)  expected-rate-of-return curve, and (2) is the interest-rate cost-of-funds curve.
D)  marginal cost curve, and (2) is the marginal benefit curve.E) B) and C)
F) All of the above

Question 19

The interest-rate cost-of-funds curve is perfectly elastic because expected rates of return on R&D are constant.

Accepted Answer

A) True 
 B)False

Question 20

The first successful commercial introduction of a new product is called

Accepted Answer

A)  innovation.
B)  research.
C)  invention.
D)  diffusion.E) A) and D)
F) A) and C)

Exam 15: Technology, RD, and Efficiency

Explain the reasoning behind the inverted-U theory of R&D expenditures.

Correct AnswerverifiedThe inverted-U theory of R&D is the idea...View AnswerShow Answer

The profit-enhancing impact of product innovation tends to be on all of the following, except

Correct AnswerverifiedC

R&D spending decisions are complicated because

Correct AnswerverifiedShow Answer

The profit-enhancing impact of process innovation tends to be on all of the following, except

Correct AnswerverifiedShow Answer

Refer to the data. At $20 million of R&D expenditures, the

Correct AnswerverifiedShow Answer

The first discovery of the water-soluble material used in contact lenses is an example of

Correct AnswerverifiedB

Which of the following statements does not apply when a firm's rivals imitate its innovation.

Correct AnswerverifiedShow Answer

A profit-maximizing firm should not undertake an R&D project for which the

Correct AnswerverifiedShow Answer

Large, well-established firms are more likely to use retained earnings to finance R&D, while small start-up firms are more likely to rely on venture capital.

Correct AnswerverifiedShow Answer

The interest-rate cost-of-funds curve is perfectly elastic because firms can borrow as much or as little as they want at market interest rates.

Correct AnswerverifiedShow Answer

According to the inverted-U theory of R&D, other things equal, firms in industries with concentration ratios around 10 percent will be more technologically progressive than firms in industries with 50 percent concentration ratios.

Correct AnswerverifiedShow Answer

Violin strings made from sheep intestines were first called "catgut" because

Correct AnswerverifiedShow Answer

The table shows the marginal utilities derived from current consumption levels of three new products, A, B, and C, that are being sold in the market at the prices listed. The consumer can immediately gain the most extra total utility by switching spending from

Correct AnswerverifiedShow Answer

In analyzing a market, the time horizon where technology can change and firms can offer new products is referred to as the

Correct AnswerverifiedShow Answer

The successful commercial introduction of a new product, the use of a new method, or the creation of a new form of business enterprise is called

Correct AnswerverifiedA

The table shows the expected rate of return, R&D spending, and interest-rate cost-of-funds for a hypothetical firm. Based on the information given, the optimal amount of R&D spending would be

Correct AnswerverifiedShow Answer

In general, which of the following is true?

Correct AnswerverifiedShow Answer

In the diagram, (1) is the

Correct AnswerverifiedShow Answer

The interest-rate cost-of-funds curve is perfectly elastic because expected rates of return on R&D are constant.

Correct AnswerverifiedShow Answer

The first successful commercial introduction of a new product is called

Correct AnswerverifiedShow Answer

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