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,reduce 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

When the interest-rate cost-of-funds curve shifts downwards, the firm can borrow capital for R&D at a lower cost. This encourages the firm to increase its R&D expenditures, which can lead to more innovation and potential for future profitability. As a result, the expected rate of return on the last dollar of R&D reduces as the firm invests more in R&D, and comes to equilibrium at a lower point on the expected-rate-of-return curve.

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