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.

Accepted Answer

The inverted-U theory of R&D suggests that as industry concentration increases, R&D intensity first increases, reaches a peak, and then decreases, forming an inverted U-shape relationship.

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.

Accepted Answer

The optimal amount of R&D for a firm occurs where the marginal cost of funding the R&D, often reflected in the interest-rate cost of funds, equals the marginal benefit of the R&D, which is the expected rate of return from the investment. This ensures the most efficient allocation of resources towards R&D activities.

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.

Accepted 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. This means that the cost of funds for a firm is not affected by the amount of money it borrows.

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.

Accepted Answer

Creative destruction refers to the process where new innovations lead to the demise of older technologies or products, thereby reshaping markets. When start-ups introduce innovations, they can increase competition by challenging existing dominant firms. Conversely, when established firms innovate, they can potentially strengthen their market position, reducing competition by setting higher barriers for new entrants.

Question 5

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

Accepted Answer

Creative destruction refers to the process where innovation and new technologies lead to the demise of older, less efficient firms and products, paving the way for growth and development in the economy.

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.

Accepted Answer

Alex will only purchase Kara's new cookware if the marginal utility he derives from it (MU) divided by its price (P) is greater than that of competing products.

Question 7

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

Accepted Answer

Technological advances can include long-term innovations and improvements in the production process, products, or services that go beyond short-run cost reductions, often leading to significant shifts in industries and economies.

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.

Accepted Answer

The inverted-U theory suggests that firms in oligopolistic markets, due to their market power and resources, are more likely to invest in R&D compared to firms in more competitive or monopolistic markets, as they seek to innovate to gain a competitive edge or maintain their market position.

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

Large, well-established firms often have significant retained earnings, which they can use to finance research and development (R&D) internally. In contrast, small start-up firms usually lack substantial internal funds and are more likely to rely on external financing sources, such as venture capital, to support their R&D activities.

Question 10

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

Accepted Answer

Technological advance primarily increases productive efficiency by allowing more output to be produced with the same amount of inputs, rather than by changing the mix of goods produced, which is determined by consumer preferences and resource allocation decisions.

Question 11

Venture capital is another name for retained earnings.

Accepted Answer

Venture capital refers to funds provided by investors to startup companies and small businesses with perceived long-term growth potential, whereas retained earnings are the portion of a company's profits not distributed to shareholders as dividends but retained for reinvestment in the business or to pay debt.

Question 12

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

Accepted Answer

Successful new products often offer better value, innovation, or efficiency, allowing consumers to derive more satisfaction (utility) from their spending on these products compared to older or less effective alternatives.

Question 13

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

Accepted Answer

Invention refers to the creation of a new product, process, or idea, while innovation involves the improvement or significant alteration of an existing product, process, or idea, often making it better or more effective. Innovations often build upon or are inspired by inventions.

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.

Accepted Answer

The marginal cost of R&D expenditures includes the opportunity cost of capital, which is often represented by the market interest rate the firm must pay to finance these expenditures.

Question 15

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

Accepted Answer

Process innovation typically leads to a more efficient production process, which is represented as a downward shift in the firm's average total cost curve, but it does not directly shift the total product curve. The total product curve, which shows the maximum output that can be produced with varying amounts of an input while holding other inputs constant, is primarily affected by changes in technology or inputs, not by process innovation's impact on costs.

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.

Accepted Answer

Diffusion refers to the process by which an innovation is communicated through certain channels over time among the members of a social system, not the initial introduction of a product or concept.

Question 17

Inventions and innovations can both be patented.

Accepted Answer

Inventions can be patented because they are tangible products or processes that meet the criteria of novelty, non-obviousness, and utility. Innovations, however, can refer to improvements, practices, or concepts that might not be patentable unless they result in a specific, novel invention.

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.

Accepted Answer

The optimal amount of R&D occurs where the marginal benefit of this activity equals the marginal cost, not where it exceeds it 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.

Accepted Answer

The inverted-U theory suggests that technological progressiveness initially increases with industry concentration but after reaching an optimal point (often at moderate levels of concentration), it starts to decline. Therefore, firms in industries with a 50 percent concentration ratio are typically more technologically progressive than those in industries with a 10 percent concentration ratio, up to a certain point of concentration.

Question 20

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

Accepted Answer

The interest-rate cost-of-funds curve is not perfectly elastic because expected rates of return on R&D (Research and Development) are not constant; they can vary significantly based on the project, industry, and economic conditions, affecting the demand for funds.

Quiz 15: Technology, RD, and Efficiency