Because firms can free ride on the research and development of other firms,
A)firms choose a level of research and development where the marginal cost of research is equal to the economy's marginal return of research.
B)firms choose a level of research and development where the marginal cost of research is above the economy's marginal return of research.
C)firms choose a level of research and development where the marginal cost of research is below the economy's marginal return of research.
D)firms choose a level of research and development where the marginal cost of research is below the individual firm's marginal return of research.
E)firms will always face marginal costs of research and development that exceed their marginal return of research.

Question

Quizplus · Accepted Answer

Due to the ability to free ride on the research and development of other firms, firms will only invest in research and development if the marginal cost is below the economy's marginal return. This means that the firm will be able to benefit from the discoveries and developments made by other firms, while also contributing to the overall advancement of the economy. If the marginal cost is above the economy's marginal return, it would not be a rational decision for the firm to invest in research and development. Choice A is incorrect because it does not take into account the ability to free ride on other firms' research and development. Choice B is also incorrect for the same reason, and implies that firms will invest in research and development even if it is not beneficial for them. Choice D is not entirely accurate because firms may still choose to invest in research and development even if it is not profitable for them individually, but still important for the overall economy. Choice E is too extreme and does not consider the possibility of the marginal return exceeding the marginal cost in some cases.

Because Firms Can Free Ride on the Research and Development