Assume that a firm's interest-rate cost-of-funds curve for R&D is perfectly elastic. Which of the following would decrease a firm's optimal R&D expenditures and, in equilibrium, increase the expected rate of return on the last dollar of R&D?
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

An upward shift of the interest-rate cost-of-funds curve would increase the cost of funds for R&D, leading to a decrease in the optimal R&D expenditures. This would in turn increase the expected rate of return on the last dollar of R&D, as the firm is now investing in more profitable R&D projects.

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