Deck 15: Technology, RD, and Efficiency

Question 1

The theory that R&D expenditures as a percentage of firms' sales first rise, reach a peak, and then fall with increases in industry concentration is called the inverted-U theory of R&D.

Answer 1

True

Question 2

A firm's optimal amount of R&D occurs where the interest-rate cost of funds and the expected rate of return are equal.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

Creative destruction may either increase or reduce competition, depending on whether the innovation is done by start-up firms or existing dominant firms.

Question 5

The process by which new firms and new products destroy existing dominant firms and their products is called creative destruction.

Question 6

Kara's Kettles, Inc. has developed a new and improved type of cookware. Alex, a typical consumer, will necessarily purchase Kara's new product if his MU/ P for the new cookware exceeds that of competing products.

Question 7

Technological advance consists of short-run adjustments to the production process that reduce costs.

Question 8

The inverted-U theory of R&D suggests that more R&D spending will be done by oligopolists than by firms producing in the other market structures.

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.

Question 10

Technological advance increases productive efficiency by giving society a more preferred mix of goods.

Question 11

Venture capital is another name for retained earnings.

Question 12

Successful new products enable consumers to increase the total utility they obtain from a specific amount of their total spending.

Question 13

Invention and innovation are not the same; innovation tends be derived from invention.

Question 14

The marginal cost to a firm of R&D expenditures is the market interest rate the firm must pay to obtain the needed financing.

Question 15

Process innovation is represented as a downward shift in a firm's total product curve and its average total cost curve.

Question 16

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.

Question 17

Inventions and innovations can both be patented.

Question 18

A firm's optimal amount of R&D occurs where the marginal benefit of this activity exceeds marginal cost by the greatest amount.

Question 19

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.

Question 20

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

Question 21

When corporations use retained earnings to finance the R&D for a new venture, the marginal cost of financing is zero.

Question 22

If a particular R&D expenditure is expected to be worthwhile, the firm should undertake it because the project will definitely increase the firm's future profits.

Question 23

One of the advantages of being first to develop a new product is the opportunity to develop brand-name recognition.

Question 24

Process innovation raises the firm's total product curve and lowers its average total cost curve.

Question 25

In business, the abbreviation "R&D" refers to recreation and discovery.

Question 26

The optimal amount of R&D spending for the firm occurs where its expected return is equal to the interest-rate cost-of-funds to finance it.

Question 27

Someone who seeks to be hired as the top manager of an existing company is a good example of an entrepreneur.

Question 28

The modern view of technological advance is that it is an external force to which the economy adjusts.

Question 29

The major impact of product innovation tends to be on the firms' revenues, while that of process innovation tends to be on costs.

Question 30

When entrepreneurs use their own personal savings to finance the R&D for their new venture, the marginal cost of financing is zero.

Question 31

All inventors are entrepreneurs.

Question 32

R&D activities by government and universities have not been an important factor in fostering technological advance.

Question 33

Entrepreneurs often form new small firms called "spin-off firms."

Question 34

Most product innovations consist of minor changes to existing products and are incremental improvements.

Question 35

U.S. business firms channel a majority of their R&D expenditures to scientific research.

Question 36

Innovation pertains to commercialization, while invention pertains more to scientific research.

Question 37

Many economists view technological advance as mainly a response to profit opportunities arising within a capitalist economy, and not some random external force.

Question 38

If an R&D activity is affordable, the firm should spend on that activity.

Question 39

R&D spending decisions by firms are complicated because they involve having to compare present expenditures against future expected gains.

Question 40

Consumers will buy a new product instead of an old one that they are used to buying, if the MU of the new product is larger than the MU of the old product.

Question 41

Refer to the data. At $40 million of R&D expenditures, the

A)marginal cost of R&D exceeds the marginal benefit.
B)marginal benefit of R&D exceeds the marginal cost.
C)expected rate of return from R&D is negative.
D)firm has exceeded its affordable level of R&D.

Question 42

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

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.

Question 43

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

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

Question 44

The U.S. government has been increasing the portion of its budget and its spending on R&D activities, for the nation's long-term growth.

Question 45

Refer to the data. The firm's optimal amount of R&D spending is

A)$40 million.
B)$60 million.
C)$80 million.
D)$20 million.

Question 46

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

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

Question 47

Suppose a firm anticipates that a particular R&D expenditure of $20 million will result in a new product and thus create a one-time added profit of $22 million a year later. The firm will

A)not undertake the R&D expenditure if its interest-rate cost of borrowing is 8 percent.
B)undertake the R&D expenditure if its interest-rate cost of borrowing is 12 percent.
C)undertake the R&D expenditure if its interest-rate cost of borrowing is 20 percent.
D)undertake the R&D expenditure if its interest-rate cost of borrowing is 9 percent.

Question 48

The technical and scientific characteristics of an industry may be less important than its structure in determining R&D spending and innovation.

Question 49

The inverted-U theory suggests that R&D effort is strongest in very high concentration industries.

Question 50

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

Question 51

The table shows the expected rate of return, R&D spending, and interest-rate cost-of-funds for a hypothetical firm. In a graph for determining the optimal R&D expenditure, the interest-cost of funds curve would be a(n)

A)upsloping line within the range $35M to $75M.
B)horizontal line at 24 percent.
C)upsloping line within the range 8 to 24 percent.
D)downsloping line within the range 24 to 8 percent.

Question 52

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

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 53

In 2016, about ____ percent of U.S. business R&D spending was for development (innovation and imitation).

A) 42
B) 79
C) 15
D) 6

Question 54

Technological advance may lead to new monopolies and may also destroy existing monopolies.

Question 55

Suppose a firm anticipates that a particular R&D expenditure of $100 million will result in a new product and thus create a one-time added profit of $108 million a year later. The firm will

A) undertake the R&D expenditure if its interest-rate cost of borrowing is 12 percent.
B) undertake the R&D expenditure if its interest-rate cost of borrowing is 10 percent.
C) not undertake the R&D expenditure if its interest-rate cost of borrowing is 9 percent.
D) not undertake the R&D expenditure if its interest-rate cost of borrowing is 7 percent.

Question 56

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

Question 57

Imitation by rivals is one factor that hinders the diffusion of technological advances.

Question 58

Suppose a firm anticipates that an R&D expenditure of $200 million will result in a new production process that will reduce costs and thus create a one-time added profit of $220 million a year later. The firm's expected rate of return is

A) 20 percent.
B) 10 percent.
C) 9.1 percent.
D) 120 percent.

Question 59

A "fast-second strategy" refers to a situation where small competitors of a dominant firm will wait for the dominant firm to innovate, and then quickly imitate the dominant firm's innovations.

Question 60

Pure monopoly is the best market structure for encouraging R&D and innovation.

Question 61

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. What is the increase in total utility from the original situation when purchasing just X, compared to now when the consumer purchases the utility-maximizing combination of both X and Y?

A)12
B)22
C)42
D)64

Question 62

Technological advance is a three-step process involving

A)invention, duplication, and diffusion.
B)duplication, innovation, and diversity.
C)invention, innovation, and diffusion.
D)necessity, invention, and solution.

Question 63

Refer to the data for a consumer whose income = $12. Assume new product Z is introduced. How many units of Z will this consumer buy, given his or her $12 budget?

A)6 units
B)4 units
C)2 units
D)0 units

Question 64

In economists' models, technological advance occurs in

A)the very long run.
B)either the short run, long run, or very long run.
C)manufacturing industries but not in service industries.
D)pure competition but not in monopolistic competition, oligopoly, and pure monopoly.

Question 65

Refer to the data for a utility-maximizing consumer whose income = $4. Assume that new product Z doesn't exist. How many units of X and Y will this consumer buy, given his or her $4 budget?

A)1 of X and 3 of Y
B)3 of X and 1 of Y
C)2 of X and 2 of Y
D)0 of X and 4 of Y

Question 66

Refer to the data for a consumer whose income = $8. Suppose the price of new product Z is $2 rather than $1. This consumer would purchase

A)none of Z.
B)some of Z but less than at a price of $1.
C)less of X, Y, and Z than if the price were $1.
D)more of X, Y, and Z than if the price were $1.

Question 67

The table shows the rate of return and R&D spending for a hypothetical firm. Assume the interest-rate cost of funds rises from 9 percent to 21 percent. What will happen to the optimal amount of R&D spending?

A)It decreases from $36 billion to $18 billion.
B)It increases from $36 billion to $48 billion.
C)It increases from $24 billion to $42 billion.
D)It decreases from $42 billion to $18 billion.

Question 68

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

A)C to A.
B)A to C.
C)B to C.
D)C to B.

Question 69

The table shows the marginal utility schedules for old product X and new product Y for a hypothetical consumer. The price of X is $3, and the price of good Y is $2. The budget of the consumer is $15. If the consumer buys both old product X and new product Y, how much will the consumer buy of each to maximize utility?

A)3X and 4Y
B)3X and 3Y
C)4X and 3Y
D)4X and 4Y

Question 70

Refer to the data for a consumer whose income = $6. In equilibrium, the introduction of new product Z has increased this consumer's total utility by

A)24 utils.
B)98 utils.
C)74 utils.
D)14 utils.

Question 71

Broadly defined, technological advance

A)can occur in the short run, long run, or very long run.
B)comprises new and improved goods and services and/or new and improved ways of producing or distributing them.
C)includes invention but not innovation or diffusion.
D)includes product innovation but not process innovation.

Question 72

The table shows the rate of return and R&D spending for a hypothetical firm. Assume the interest-rate cost of funds is 7 percent. What is the optimal amount of R&D expenditures?

A)$30 billion
B)$42 billion
C)$36 billion
D)$48 billion

Question 73

Technological advance is shown as a(n)

A)movement from a point inside a production possibilities curve to a point on the curve.
B)movement along a production possibilities curve.
C)outward shift of a production possibilities curve.
D)inward shift of a production possibilities curve.

Question 74

The table shows the expected rate of return, R&D spending, and interest-rate cost-of-funds for a hypothetical firm. If interest-rate cost-of-funds rose to 11, the optimal amount of R&D spending would be

A)$35 million.
B)$45 million.
C)$55 million.
D)$75 million.

Question 75

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 $12. If the consumer can only buy old product X, how much will the consumer buy and what will be the total utility from spending the given budget?

A)4X and 42
B)3X and 12
C)5X and 60
D)3X and 42

Question 76

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

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

Question 77

The table shows the rate of return and R&D spending for a hypothetical firm. Assume the interest-rate cost of funds is 9 percent. What will be the marginal cost and the marginal benefit of the optimal amount of R&D spending?

A)MC = 5 percent; MB = 9 percent
B)MC = 9 percent; MB = 9 percent
C)MC = 9 percent; MB = 13 percent
D)MC = 5 percent; MB = 5 percent

Question 78

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

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 79

Refer to the data for a consumer whose income = $16. Suppose the price of new product Z is $2 rather than $1. This consumer would purchase

A)three units of Z.
B)four units of Z.
C)two units of Z.
D)more of X, Y, and Z than if the price were $1 for Z.

Question 80

A firm decides to make a $40 million expenditure on research and development that will create a new product. This product is expected to generate a one-time increase in the firm's revenues by a total of $150 million a year later. The firm also estimates that the production cost of the new product will be $107 million, also realized one year after the initial R&D expenditure. What is the expected rate of return on this research and development expenditure?

A)12.5 percent
B)9.3 percent
C)7.5 percent
D)28.7 percent