In deciding on an optimal amount and type of research and development, firms should adhere to the rule: Expand R&D until
A)expected rate of return is zero.
B)expected rate of return equals the interest rate.
C)expected rate of return exceeds the interest rate by the greatest amount.
D)the interest rate is constant.

Question

Quizplus · Accepted Answer

The optimal point for expanding R&D is when the expected rate of return equals the interest rate. This is because, at this point, the cost of investing an additional dollar in R&D (reflected by the interest rate) is exactly matched by the expected return from that investment, ensuring that resources are used efficiently without leaving unexploited opportunities for higher returns elsewhere.

In Deciding on an Optimal Amount and Type of Research