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 indicates that the firm expects higher returns from R&D investments, which would increase optimal R&D expenditures while keeping 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