1. Suppose a firm expects that a $20 million expenditure on R&D will result in a new product that will increase its revenue by a total of $30 million 1 year from now. The firm estimates that the production cost of the new product will be $29 million. - What is the expected rate of return on this R&D expenditure?
- Suppose the firm can get a bank loan at 6 percent interest to finance its $20 million R&D project. Will the firm undertake the project? Explain why or why not.
- Now suppose the interest-rate cost of borrowing, in effect, falls to 4 percent because the firm decides to use its own retained earnings to finance the R&D. Will this lower interest rate change the firm's R&D decision? Explain.
2. Answer the following lettered questions on the basis of the information in this table:  <![CDATA[<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/1113273090/384253/KeyQuestion_Ch24_Graph01.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (28.0K)</a>]]>- If the interest-rate cost of funds is 8 percent, what will be the optimal amount of R&D spending for this firm?
- Explain why $20 million of R&D spending will not be optimal.
- Why won't $60 million be optimal either?
3. Refer to Table 24.1 and suppose the price of new product C is $2 instead of $4. How does this affect the optimal combination of products A, B, and C for the person represented by the data? Explain: "The success of a new product depends not only on its marginal utility but also on its price." 4. Answer the following questions on the basis of this information for a single firm: total cost of capital = $1,000; price paid for labor = $12 per labor unit; price paid for raw materials = $4 per raw-material unit. - Suppose the firm can produce 5,000 units of output by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 5,000 units of output?
- Now assume the firm improves its production process so that it can produce 6,000 units of output by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average cost of producing the 6,000 units of output?
- Refer to your answers to 8a and 8b and explain how process innovation can improve economic efficiency.
|
