The optimal amount of R&D spending for the firm occurs where its expected return is equal to the interest-rate cost-of-funds to finance it.

Question

Quizplus · Accepted Answer

The optimal amount of R&D spending for a firm occurs at the point where the marginal expected return from R&D investment equals the marginal cost of funds used to finance it, which is often proxied by the interest rate. This ensures that the firm is allocating its resources efficiently, maximizing its return on investment without overspending on R&D relative to its cost of financing.

The Optimal Amount of R&D Spending for the Firm Occurs