ECON 231
Chapter 13 Study Quiz


1.
Funds lent to startup firms in return for shares of the profit if the firms succeed are called:
A.
retained earnings.
B.
time deposits.
C.
venture capital.
D.
transfer payments.


2.
Suppose a firm anticipates that a particular R&D expenditure of $20 million will result in a new product and thus create a one-time added profit of $22 million a year later. The firm will:
A.
not undertake the R&D expenditure if its interest-rate-cost of borrowing is 8 percent.
B.
undertake the R&D expenditure if its interest-rate-cost of borrowing is 12 percent.
C.
undertake the R&D expenditure if its interest-rate-cost of borrowing is 20 percent.
D.
undertake the R&D expenditure if its interest-rate-cost of borrowing is 9 percent.


3.
A patent on a new product benefits the firm securing it by:
A.
limiting the direct imitation of the product by rivals for many years.
B.
enabling the firm to retain "trade secrets" about the product.
C.
reducing the firm's legal expenses.
D.
increasing the speed of diffusion of the new product.


4.
The process by which new firms and new products replace existing dominant firms and products is called:
A.
monopolistic competition.
B.
the inverted-U process.
C.
process innovation.
D.
creative destruction.


5.
The marginal cost to a firm of R&D expenditures is the market interest rate the firm must pay to obtain the needed financing.
A. True
B. False


6.
The corporate decision on type and level of R&D activity is difficult because:
A.
the interest-rate cost of funds is difficult to estimate.
B.
much of corporate R&D is based on the pursuit of science, not on the profit motive.
C.
expected returns lie in the future and are highly uncertain.
D.
total returns and marginal returns greatly diverge.


7.
The theory of creative destruction was advanced many years ago by:
A.
Rocky Balboa.
B.
John Maynard Keynes.
C.
Joseph Schumpeter.
D.
Adam Smith.


Consumer's income = $12

Reference: Ref26056

8.
Refer to the above data. Assume new product Z is introduced. How many units of Z will this consumer buy, given his or her $12 budget?
A.
zero units
B.
2 unit.
C.
4 units.
D.
6 units.


9.
The conjecture that R&D expenditures as a percentage of firms' sales first rise, reach a peak, and then fall as industry concentration rises is known as the.
A.
inverted-U theory.
B.
average product of R&D theory.
C.
bell-shaped curve.
D.
theory of increasing and diminishing returns.


10.
As pizza topped with barbecue chicken became popular at specialty restaurants, Pizza Hut introduced a similar pizza. This imitation illustrates:
A.
innovation.
B.
invention.
C.
creative destruction.
D.
diffusion.


11.
Fast-second strategies are more likely to be used by:
A.
dominant firms than by startup firms.
B.
pure competitors rather than oligopolists.
C.
startup firms rather than existing firms.
D.
entrepreneurs than by corporations.


12.
Process innovation can be depicted as:
A.
an upward shift in a firm's total product curve.
B.
an upward shift in a firm's marginal cost curve.
C.
a downward shift in a firm's marginal revenue curve.
D.
an increase in product demand.


13.
New scientific knowledge mainly comes from university and government laboratories, not private firms, because:
A.
large corporations do not have funds available to channel toward basic research.
B.
government pays scientists higher salaries than do private firms.
C.
entrepreneurs find it difficult to secure venture capital to finance innovation.
D.
basic scientific principles, as such, cannot be patented and do not always have commercial applicability.


14.
How do entrepreneurs differ from "other innovators?"
A.
entrepreneurs bear risk; "other innovators" do not.
B.
"other innovators" bear risk; entrepreneurs do not.
C.
entrepreneurs only invent; "other innovators" find new markets for inventions.
D.
entrepreneurs develop entirely new products; "other innovators" focus on product improvements.


15.
(Last Word) In 1981, IBM introduced its version of the personal computer to compete with existing personal computers offered by Apple and others. IBM's action best exemplifies:
A.
invention.
B.
scientific determinism.
C.
diffusion.
D.
technological lag.


16.
As it relates to the R&D decision, the interest-rate-cost-of-funds curve:
A.
usually slopes downward.
B.
is the marginal cost element in the MB = MC decision framework.
C.
indicates a constant rate of return, r.
D.
reflects the interest rate on bank loans, but not the implicit interest rate on the use of retained earnings.


Reference: REF26049

17.
In the above diagram, at $60 million of R&D expenditure the:
A.
expected rate of return exceeds the interest rate cost of funds.
B.
firm is spending an optimal amount on R&D.
C.
interest rate cost of funds exceeds the expected rate of return.
D.
expected rate of return on R&D is negative.


18.
The commercial success of a new product depends on:
A.
its price only.
B.
its marginal utility only.
C.
both its price and its marginal utility.
D.
neither its price nor its marginal utility.


19.
(Consider This)   Violin strings made from sheep intestines were first called "catgut" because:
A.
at the time it was thought to be extremely unlucky to kill sheep.
B.
the inventor wanted to establish a legally protected brand name.
C.
the inventor wanted to preserve his trade secret.
D.
the inventor thought that "catgut" would sound less offensive to buyers than "sheep intestines."


20.
In the United States, research and development spending as a percentage of GDP is:
A.
1.5 to 2.0 percent, which is lower than that of most other industrial countries.
B.
2.5 to 3.0 percent, which is higher than that of most other industrial countries.
C.
4.5 to 5.0 percent, which is lower than that of most other industrial countries.
D.
5.5 to 6.0 percent, which is higher than that of most other industrial countries.


Reference: REF26068

21.
Refer to the above diagram which relates to Firm A. Which of the following would shift A's average total cost curve from ATC1 to ATC2?
A.
replacement of old equipment with new, more productive equipment embodying technological advance.
B.
a decrease in the incomes of A's customers
C.
a move along A's total product curve (not shown)
D.
the increase in the price of one of the major inputs used to produce A's product.


22.
(Consider This)   The central idea illustrated by the vignette on "catgut" used as violin strings is:
A.
patent rights.
B.
research and development activity.
C.
derived demand.
D.
trade secrets.


23.
Which pair of market structures provide firms with the greatest ability to finance R&D out of retained earnings?
A.
oligopolists and pure monopolists.
B.
pure competitors and pure monopolists.
C.
pure competitors and monopolistic competitors.
D.
monopolistic competitors and pure monopolists.


Reference: REF26068

24.
Refer to the above diagram which relates to Firm A. Which of the following would shift A's average total cost curve from ATC1 to ATC2?
A.
an increase in the price of a key component used by A in producing its product
B.
a decrease in the incomes of A's customers
C.
a move along A's total product curve (not shown)
D.
an improved production method that shifts A's total product curve upward


25.
Other things equal, patents:
A.
decrease the expected rate of return on a R&D expenditure.
B.
increase the expected rate of return on a R&D expenditure.
C.
increase the interest-rate cost of funds used to finance a R&D expenditure.
D.
decrease the interest-rate cost of funds used to finance a R&D expenditure.


26.
In the inverted-U theory:
A.
process innovation and product innovation are inversely related.
B.
technological change is inversely related to scientific discovery.
C.
R&D expenditures rise continuously as a percentage of firms' sales as industry concentration rises.
D.
R&D expenditures first rise as a percentage of firms' sales as industry concentration increases, but then fall as higher industry concentration occurs.


27.
Technological advance includes new and improved products, new and improved production techniques, and new and improved distribution methods
A. True
B. False


28.
Diffusion is the first successful commercial introduction of a product, the use of a new method, or the creation of new form of business enterprise.
A. True
B. False


29.
A firm's optimal amount of R&D occurs where the interest-rate cost of funds and the expected rate of return are equal.
A. True
B. False



Reference: Ref26044

30.
Refer to the above data. At $20 million of R&D expenditures, the:
A.
marginal cost of R&D exceeds the marginal benefit.
B.
expected total return from R&D is at a maximum.
C.
interest rate cost of funds is negative.
D.
marginal benefit of R&D exceeds the marginal cost.


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