An amount of R&D spending that is greater than the optimal amount indicates that the
A) marginal benefit of R&D expenditures is equal to the marginal cost.
B) marginal benefit of R&D expenditures is greater than the marginal cost.
C) interest-rate cost-of-funds is less than the expected rate of return.
D) interest-rate cost-of-funds is greater than the expected rate of return.

Question

Quizplus · Accepted Answer

When the amount of R&D spending is greater than the optimal amount, it indicates that the interest rate cost-of-funds (the cost of borrowing money) is greater than the expected rate of return on the R&D investments. This suggests that firms are taking on too much debt to finance their R&D projects, which reduces their profitability and overall financial health. Therefore, the best choice is option D, which states that the interest-rate cost-of-funds is greater than the expected rate of return.

An Amount of R&D Spending That Is Greater Than the Optimal