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 for R&D would increase a firm's optimal R&D expenditures because it indicates higher expected returns for each level of investment in R&D. Since the interest-rate cost-of-funds curve is perfectly elastic, the interest rate remains unchanged, thus leaving the expected rate of return on the last dollar of R&D unchanged in equilibrium.

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