Assume that a firm's interest-rate cost-of-funds curve for R&D is perfectly elastic. Which of the following would increase a firm's optimal R&D expenditures and, in equilibrium, leave the expected rate of return on the last dollar of R&D unchanged?
A)a rightward shift of the expected-rate-of-return curve
B)an upward shift of the interest-rate cost-of-funds curve
C)a leftward shift of the expected-rate-of-return curve
D)a downward shift of the interest-rate cost-of-funds curve

Question

Quizplus · Accepted Answer

A rightward shift of the expected-rate-of-return curve increases the expected return on R&D investments at each level of expenditure, encouraging the firm to invest more in R&D without changing the cost of funds, thus leaving the expected rate of return on the last dollar of R&D unchanged due to the perfectly elastic cost-of-funds curve.

Assume That a Firm's Interest-Rate Cost-Of-Funds Curve for R&D Is