A firm should increase the amount of R&D expenditures to
A) the maximum amount of funding that is available to the firm.
B) the point where the expected return equals the cost of funds.
C) a critical minimum level so that the firm can remain competitive.
D) a point where the difference between the expected return and the cost of funds is at a maximum.

Question

Quizplus · Accepted Answer

The firm should increase R&D expenditures up to the point where the expected return equals the cost of funds. This is the optimal level of R&D spending where the benefits from innovation and new product development are balanced against the costs of financing these activities. Going beyond this point would reduce the firm's profitability as the cost of funds for additional R&D expenditures would exceed the expected return. On the other hand, spending less than this point would reduce the firm's competitiveness and market position. Therefore, the optimal level of R&D spending should be determined based on the trade-off between the expected return and the cost of funds.

A Firm Should Increase the Amount of R&D Expenditures to