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CHAPTER 26

Technology, R&D, and Efficiency

Topic

Question numbers 1-19 20-29 30-34 35-39 40-57 58-67 68-75 76-80 81-93 94-100 101-107 108-113 114-115 116-118 119-130

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1. Technological advance: invention; innovation; diffusion 2. Entrepreneurship; scientific research 3. R&D: interest-rate cost of funds 4. R&D: expected rate of return 5. Optimal R&D 6. Product innovation and revenue enhancement 7. Process innovation and cost reduction 8. Imitation problem: "fast-second strategy" 9. Benefits of being first with innovation 10. Role of market structure 11. Inverted-U theory; role of scientific opportunity 12. Technological advance and efficiency Consider This Last Word True-False Multiple Choice Questions Technological advance: invention; innovation; diffusion

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Type: D Topic: 1 E: 484 MI: 240 1. Broadly defined, technological advance: A) can occur in either the short run, long run, or very long run. B) comprises new and improved goods and services and new and improved ways of producing or distributing them. C) includes invention, but not innovation or diffusion. D) includes product innovation, but not process innovation. Answer: B

Type: F Topic: 1 E: 484 MI: 240 2. In economists' models, technological advance occurs in: A) the very long run. B) either the short run, long run, or very long run. C) manufacturing industries but not in service industries. D) pure competition, but not in monopolistic competition, oligopoly, and pure monopoly. Answer: A

Type: A Topic: 1 E: 484 MI: 240 3. Technological advance is shown as a(n): A) movement from a point inside a production possibilities curve to a point on the curve. B) movement along a production possibilities curve. C) outward shift of a production possibilities curve. D) inward shift of a production possibilities curve. Answer: C

Type: D Topic: 1 E: 484 MI: 240 4. Technological advance is a three-step process involving: A) invention, duplication, and diffusion. C) invention, innovation, and diffusion. B) duplication, innovation, and diversity. D) necessity, invention, and solution. Answer: C

Type: A Topic: 1 E: 484 MI: 240 5. Fiber-optic telephone lines are rapidly replacing copper telephone cable. This is an example of: A) capital-labor substitutability. C) market (or monopoly) power. B) economies of scale. D) technological advance. Answer: D

Type: D Topic: 1 E: 485 MI: 241 6. The first discovery (as distinct from first commercial application) of a product or process is called: A) innovation. B) invention. C) creative destruction. D) diffusion. Answer: B

Type: D Topic: 1 E: 485 MI: 241 7. The successful commercial introduction of a new product, the use of a new method, or the creation of a new form of business enterprise is called: A) innovation. B) invention. C) creative destruction. D) diffusion. Answer: A

Type: D Topic: 1 E: 485 MI: 241 8. The wide imitation and spread of an innovation is called: A) innovation. B) invention. C) creative destruction. Answer: D

D) diffusion.

Type: D Topic: 1 E: 485 MI: 241 9. The first successful commercial introduction of a new product refers to: A) invention. B) innovation. C) diffusion. D) diversification. Answer: B

Type: A Topic: 1 E: 485 MI: 241 10. The first commercial introduction, as opposed to first discovery, of transparent tape is an example of: A) innovation. B) invention. C) creative destruction. D) diffusion. Answer: A

Type: A Topic: 1 E: 485 MI: 241 11. The first discovery, as opposed to first commercial application, of the water-soluble material used in contact lens is an example of: A) innovation. B) invention. C) creative destruction. D) diffusion. Answer: B

Type: D Topic: 1 E: 485 MI: 241 12. The spread of innovation through imitation refers to: A) invention. B) diffusion. C) duplication. D) diversification. Answer: B

Type: A Topic: 1 E: 485 MI: 241 13. 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. Answer: D

Type: A Topic: 1 E: 485 MI: 241 14. Kodak introduced to the marketplace a digital camera which uses no film, but which takes photos that can be shown on personal computers. This is an example of: A) economies of scale. B) product innovation. C) process innovation. D) venture capital. Answer: B

Type: A Topic: 1 E: 485 MI: 241 15. Suppose firm X implements a new process for extracting copper from copper-bearing ore. This is an example of: A) product innovation. B) process innovation. C) economics of scale. D) the inverted-U theory. Answer: B

Type: C Topic: 1 E: 485 MI: 241 16. Which of the following is a true statement? A) innovation normally follows invention and precedes diffusion. B) invention normally follows diffusion and precedes innovation C) diffusion normally follows invention and precedes innovation. D) innovation normally follows diffusion and precedes invention. Answer: A

Type: A Topic: 1 E: 485 MI: 241 17. Innovation: A) is the first discovery of a product or process, rather than its first successful commercial introduction. B) includes new products, but not new production methods. C) is also known as diffusion. D) can either increase or decrease the market share of a large firm, depending on whether it is introduced by the large firm or one of its competitors. Answer: D

Type: F Topic: 1 E: 485 MI: 241 18. 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. Answer: B

Type: F Topic: 1 E: 485 MI: 241 19. Which of the following correctly orders, highest to lowest, the relative magnitudes of U.S spending by businesses on components of R&D? A) invention, basic research, innovation. C) innovation, invention, basic research. B) invention, innovation, basic research. D) basic research, invention, innovation. Answer: C

Entrepreneurship; scientific research Type: A Topic: 2 E: 485 MI: 241 20. When economists view technological change as internal to the economy, they mean that it: A) occurs randomly. B) occurs accidentally. C) arises deliberately from the profit motive and competition. D) arises mainly from government subsidies. Answer: C

Type: F Topic: 2 E: 485 MI: 241 21. U.S. firms collectively devote the largest portion of their total R&D spending to: A) applied research (pursuing invention). C) innovation and diffusion. B) basic scientific research. D) financing startup firms. Answer: C

Type: F Topic: 2 E: 485 MI: 241 22. About ____ percent of business R&D spending is for basic research. A) 1. B) 6. C) 13. D) 20. Answer: B

Type: A Topic: 2 E: 486 MI: 242 23. The modern view of technological advance is that it: A) is rooted in the independent advance of science, an element largely external to the market system. B) it is rarely carried out by oligopolists or pure monopolists. C) is an internal element of capitalism, occurring in responses to profit incentives. D) necessarily destroys existing monopoly power. Answer: C

Type: A Topic: 2 E: 486 MI: 242 24. 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. Answer: A

Type: F Topic: 2 E: 486 MI: 242 25. Entrepreneurship: A) can be carried out either by individuals or teams of individuals. B) is no longer important in a world of large corporate R&D laboratories. C) is, by definition, carried out by a single individual. D) is relevant to pure competition but not to the other market structures. Answer: A

Type: A Topic: 2 E: 486-487 MI: 242-243 26. Entrepreneurs: A) work exclusively in government and university R&D laboratories. B) often form small companies called startups. C) are less likely to exist in service industries than in manufacturing industries. D) are engaged mainly in basic scientific research. Answer: B

Type: A Topic: 2 E: 487 MI: 243 27. Entrepreneurs: A) include everyone engaged in R&D work. B) are located in small enterprises only. C) try to anticipate the future. D) work exclusively in government and university R&D laboratories. Answer: C

Type: F Topic: 2 E: 487 MI: 243 28. The major source of new scientific knowledge in the United States is: A) university and government research. B) R&D work in large corporations. C) entrepreneurs working alone. D) purely competitive and monopolistically competitive firms. Answer: A

Type: A Topic: 2 E: 487 MI: 243 29. 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. Answer: D

R&D: interest-rate cost of funds Type: A Topic: 3 E: 488 MI: 244 30. 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. Answer: B

Type: D Topic: 3 E: 488 MI: 244 31. 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. Answer: C

Type: C Topic: 3 E: 488 MI: 244 32. In exchange for a share of ZYX's profits if it succeeds, Firm ABC provides development funds to newly formed ZYX which is developing an innovative product. ABC funds are called ____________while ZYX is know as a ____________. A) venture capital; startup. C) mutual funds; startup. B) retained earnings; entrepreneurial firm. D) transfer payments; entrepreneurial firm. Answer: A

Type: D Topic: 3 E: 488 MI: 244 33. The retained earnings that corporations often use to finance R&D are also known as: A) venture capital. B) undistributed corporate profits. C) dividends. D) mutual funds. Answer: B

Type: F Topic: 3 E: 488 MI: 244 34. A major source of funding of R&D in large, established corporations is: A) venture capital. B) dividends. C) mutual funds. D) retained earnings. Answer: D

R&D: expected rate of return Type: A Topic: 4 E: 488 MI: 244 35. The marginal benefit to a firm from its R&D expenditures is depicted by its: A) interest-rate-cost of funds curve. C) venture capital acquisition curve. B) expected-rate-of-return curve. D) retained earnings pay-out curve. Answer: B

Type: A Topic: 4 E: 489 MI: 245 36. As it relates to R&D, the expected-rate-of-return curve, r: A) usually slopes upward. B) shows the cost of financing various levels of R&D. C) varies in location depending on the location of the interest-rate-cost-of-funds curve, i. D) represents the marginal benefit element in the MB = MC decision framework. Answer: D

Type: A Topic: 4 E: 489 MI: 245 37. Suppose a firm anticipates that a R&D expenditure of $100 million will result in a new production process that will reduce costs and thus create a one-time added profit of $112 million a year later. The firm's expected rate of return is: A) 0.12 percent. B) 112 percent. C) 12 percent. D) 2 percent. Answer: C

Type: A Topic: 4 E: 489 MI: 245 38. As it relates to R&D, a firm's expected-rate-of-return-curve, r: A) slopes downward because the firm arrays, highest to lowest, the rates of returns on R&D activities. B) slopes upward because of the law of diminishing returns. C) is a horizontal line. D) depends on whether it borrows from the bank or used retained earnings in financing R&D. Answer: A

Type: A Topic: 4 E: 490 MI: 246 39. 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. Answer: C

Optimal R&D Type: A Topic: 5 E: 489-490 MI: 245-246 40. A profit-maximizing firm should not undertake a R&D project for which the: A) Expected rate of return exceeds its interest-rate cost of funds. B) interest-rate cost of funds exceeds the expected rate of return. C) expected returns are in the distant future. D) the expected returns, though potentially very large, are uncertain. Answer: B

Type: A Topic: 5 E: 488-489 MI: 244-245 41. In deciding on an optimal amount and type of research and development, firms should adhere to the rule: Expand R&D until: A) expected rate of return is zero. B) expected rate of return equals the interest rate. C) expected rate of return exceeds the interest rate by the greatest amount. D) the interest rate is constant. Answer: B

Type: A Topic: 5 E: 488-489 MI: 244-245 42. Suppose a firm anticipates that a particular R&D expenditure of $100 million will result in a new product and thus create a one-time added profit of $108 million a year later. The firm will: A) undertake the R&D expenditure if its interest-rate-cost of borrowing is 12 percent. B) undertake the R&D expenditure if its interest-rate-cost of borrowing is10 percent. C) not undertake the R&D expenditure if its interest-rate-cost of borrowing is 9 percent. D) not undertake the R&D expenditure if its interest-rate-cost of borrowing is 7 percent. Answer: C

Type: A Topic: 5 E: 488-489 MI: 244-245 43. 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. Answer: D

Use the following to answer questions 44-48:

Type: T Topic: 5 E: 488-489 MI: 244-245 44. If we plotted the above data on a graph with R&D expenditures on the horizontal axis, the: A) interest-rate-cost-of-funds-curve would be a vertical line. B) interest-rate-cost-of-funds-curve would be horizontal line. C) expected-rate-of-return-curve would slope upward. D) expected-rate-of-return-curve would be a horizontal line. Answer: B

Type: T Topic: 5 E: 488-489 MI: 244-245 45. If we plotted the above data on a graph with R&D expenditures on the horizontal axis, the: A) interest-rate-cost-of-funds-curve would be a vertical line. B) interest-rate-cost-of-funds-curve would slope downward. C) expected-rate-of-return-curve would slope downward. D) expected-rate-of-return-curve would be a horizontal line. Answer: C

Type: T Topic: 5 E: 490 MI: 246 46. Refer to the above data. The firm's optimal amount of R&D spending is: A) $20 million. B) $40 million. C) $60 million. D) $80 million. Answer: D

Type: T Topic: 5 E: 490 MI: 246 47. Refer to the above data. At $100 million of R&D expenditures, the: A) marginal cost of R&D exceeds the marginal benefit. B) marginal benefit of R&D exceeds the marginal cost. C) expected rate of return from R&D is negative. D) firm has exceeded its affordable level of R&D. Answer: A

Type: T Topic: 5 E: 490 MI: 246 48. 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. Answer: D

Use the following to answer questions 49-53:

Type: G Topic: 5 E: 490 MI: 246 49. In the above diagram, (1) is the: A) expected-rate-of-return curve and (2) is the average total cost curve. B) total revenue curve and (2) is the interest-rate-cost-of funds-curve. C) expected-rate-of-return curve and (2) is the interest-rate-cost-funds curve. D) marginal cost curve and (2) is the marginal benefit curve. Answer: C

Type: G Topic: 5 E: 490 MI: 246 50. In the above diagram, the optimal amount of R&D is: A) $20 million. B) $80 million. C) $40 million. D) $60 million. Answer: C

Type: G Topic: 5 E: 490 MI: 246 51. In the above diagram, at $10 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) marginal benefit of R&D is less than the marginal cost of R&D. Answer: A

Type: G Topic: 5 E: 490 MI: 246 52. 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. Answer: C

Type: G Topic: 5 E: 490 MI: 246 53. In the above diagram, at $40 million of R&D expenditure, the expected rate of return: A) equals the interest rate cost of funds. C) is less than the interest rate cost of funds. B) is greater than the interest rate cost of funds. D) is negative. Answer: A

Type: C Topic: 5 E: 490 MI: 246 Status: New 54. 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 Answer: D

Type: C Topic: 5 E: 490 MI: 246 Status: New 55. 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 Answer: B

Type: C Topic: 5 E: 490 MI: 246 Status: New 56. 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, leave the expected rate of return on R&D unchanged? 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 Answer: A

Type: C Topic: 5 E: 490 MI: 246 Status: New 57. 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, leave the expected rate of return on R&D unchanged? 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 Answer: C

Product innovation and revenue enhancement Type: A Topic: 6 E: 491 MI: 247 58. A consumer will buy a new product rather than an existing product: A) when the MU/P of the new product is less than the MU/P of the existing product. B) when the substitution of the new product for the old product increases the consumer's total utility. C) only if the new product has a lower price than the existing product. D) only if the MU of the new product exceeds the MU of the existing product. Answer: B

Type: A Topic: 6 E: 491 MI: 247 59. We know with certainty that a consumer will buy a newly introduced product rather than an existing product when the: A) MU/P of the new product exceeds the MU/P of the existing product. B) price of the new product is less than the price of the existing product. C) MU of the new product is more than the MU of the existing product. D) law of diminishing marginal utility applies to the existing product. Answer: A

Use the following to answer questions 60-63: Consumer's income = $12

Type: T Topic: 6 E: 491 MI: 247 60. Refer to the above data for a utility-maximizing consumer. Assume that new product Z doesn't exist. How many units of X and Y will this consumer buy, given his or her $12 budget? A) 5 of X and 7 of Y. B) 7 of X and 5 of Y. C) 6 of X and 6 of Y. D) 5 of X and 6 of Y. Answer: A

Type: T Topic: 6 E: 491 MI: 247 61. 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. Answer: D

Type: T Topic: 6 E: 491 MI: 247 62. Refer to the above data. In equilibrium, the introduction of new product Z has increased this consumer's total utility by: A) 42 utils. B) 54 utils. C) 60 utils. D) 66 utils. Answer: C

Type: T Topic: 6 E: 491 MI: 247 63. Refer to the above data. Suppose the price of new product Z is $10 rather than $1. This consumer would purchase: A) some of Z but not as much as if the price were $1. B) none of Z. C) less of X, Y, and Z than if the price were $1. D) more of X, Y, and Z than if the price were $1. Answer: B

Type: A Topic: 6 E: 491 MI: 247 64. The commercial success of a new product depends on: A) its price only. C) both its price and its marginal utility. B) its marginal utility only. D) neither its price nor its marginal utility. Answer: C

Type: A Topic: 6 E: 491 MI: 247 65. For a new product to be profitable, it must: A) enable customers to obtain greater total utility from their money income. B) be less expensive than existing substitute products. C) have greater marginal utility than existing substitute products. D) embody process innovation. Answer: A

Type: A Topic: 6 E: 491 MI: 247 66. Suppose that a firm introduces a highly profitable new product. If this new product is priced higher than existing substitute products, then the: A) new product has greater marginal utility than the existing products. B) laws of economics have been violated. C) new product must have increasing, not diminishing, marginal utility. D) existing products were unprofitable to produce. Answer: A

Type: A Topic: 6 E: 491 MI: 247 67. Suppose that a firm introduces a highly profitable new product. If this new product offers less marginal utility per unit to consumers than existing substitute products, then the: A) laws of economics have been violated. B) new product must have increasing, not diminishing, marginal utility. C) existing products were being produced at a loss. D) new product has a lower price than the existing substitute products. Answer: D

Process innovation and cost reduction Type: D Topic: 7 E: 492 MI: 248 68. Process innovation refers to: A) development of new products. B) implementation of better methods of producing products. C) first discovery of new scientific principles. D) wide-spread imitation of innovations. Answer: B

Type: A Topic: 7 E: 492 MI: 248 69. Firm ABC designs and implements a lower-cost method of producing its product. This is an example of: A) product innovation. B) the inverted U-theory. C) economies of scale. D) process innovation. Answer: D

Type: A Topic: 7 E: 492-493 MI: 248-249 70. Process innovation causes an upward shift in a firm's total product curve and: A) a decrease in its average product. C) an upward shift in its average total cost curve. B) a downward shift in its average total cost curve. D) an upward shift in its marginal revenue curve. Answer: B

Type: A Topic: 7 E: 492 MI: 248 71. 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. Answer: A

Use the following to answer questions 72-73:

Type: G Topic: 7 E: 492-493 MI: 248-249 72. 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 Answer: D

Type: G Topic: 7 E: 492-493 MI: 248-249 73. 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. Answer: A

Use the following to answer questions 74-75:

Type: G Topic: 7 E: 492-493 MI: 248-249 74. Refer to the above diagram that relates to Firm X. Which of the following would illustrate process innovation by X? A) a downshift in the total product curve from TP1 to TP2 B) an upshift in the total product curve from TP2 to TP1 C) a move from a to b on TP1 D) a move from c to d on TP2 Answer: B

Type: G Topic: 7 E: 492-493 MI: 248-249 75. Refer to the above diagram that relates to Firm X. Suppose X implements an innovative new production method that shifts its total product curve from TP2 to TP1. Other things equal: A) the average product of X's labor would fall. B) the average total cost of X's output would decline. C) X would supply less output at each product price than before. D) the demand curve for X's product would shift to the right. Answer: B

Imitation problem: "fast-second strategy" Type: A Topic: 8 E: 493 MI: 249 76. As it relates to R&D, the imitation problem is that: A) patents, copyrights, and trademarks hinder imitation and thus limit economically desirable diffusion. B) brand names create entry barriers for would-be competitors. C) diffusion of innovation occurs more slowly than is desirable from society's perspective. D) a firm's rivals may be able to copy its new product or process innovation, reducing its return on R&D. Answer: D

Type: A Topic: 8 E: 493 MI: 249 77. Gigantic Corporation follows a strategy of waiting for rivals to innovate, then quickly imitating any successful innovations. This behavior is known as: A) collusion. C) a fast-second strategy. B) an entrepreneurial strategy. D) pricing the demand curve. Answer: C

Type: A Topic: 8 E: 493 MI: 249 78. Fast-second strategies are more likely to be used by: A) dominant firms than by startup firms. C) startup firms rather than existing firms. B) pure competitors rather than oligopolists. D) entrepreneurs than by corporations. Answer: A

Type: A Topic: 8 E: 493 MI: 249 79. Other things equal, the prospect of imitation by others: A) decreases the expected rate of return on R&D expenditures. B) increases the expected rate of return on R&D expenditures. C) increases the interest-rate cost of funds used to finance R&D expenditures. D) decreases the interest-rate cost of funds used to finance R&D expenditures. Answer: A

Type: A Topic: 8 E: 493 MI: 249 80. All of the following increase the expected rate of return on R&D expenditures, except: A) patents. B) trademarks. C) imitation by others. D) trade secrets. Answer: C

Benefits of being first with innovation Type: D Topic: 9 E: 493 MI: 249 Status: New 81. Legal protections against competitors producing and selling a product identical to the one you invented are called _________; legal protections against competitors using your product's name are called __________. A) patents; trademarks B) trademarks, copyrights C) copyrights, patents D) trademarks, patents Answer: A

Type: A Topic: 9 E: 493 MI: 249 Status: New 82. Suppose that Marlen Fisher has legal protection against anyone producing and selling a fishing lure identical to his unique-action "MarFish" lure, whatever the competitor might name the lure. This legal protection is most likely to be a: A) trademark. B) restraining order. C) patent. D) copyright. Answer: C

Type: A Topic: 9 E: 493 MI: 249 Status: New 83. Suppose that Marlen Fisher has legal protection against anyone producing and selling a fishing lure specifically named "MarFish." This legal protection is most likely to be a: A) trademark. B) restraining order. C) patent. D) copyright. Answer: A

Type: A Topic: 9 E: 493 MI: 249 Status: New 84. Suppose that Book-Cost Busters (TCB), without authorization, reproduced a best-selling novel and placed it for downloading on the TCB pay-for-use website. This action would violate the publisher's: A) profit rights. B) patent. C) copyright. D) trademark. Answer: C

Type: A Topic: 9 E: 493 MI: 249 85. 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. Answer: B

Type: A Topic: 9 E: 493 MI: 249 86. Other things equal, trademarks and brand names: A) increase the interest-rate cost of funds used to finance R&D expenditures. B) decrease the interest-rate cost of funds used to finance R&D expenditures. C) decrease the expected rate of return on R&D expenditures. D) increase the expected rate of return on R&D expenditures. Answer: D

Type: C Topic: 9 E: 493 MI: 249 87. Suppose that a firm's legal staff concludes that a new product that a firm is developing is patentable. Graphically, this new information would shift the firm's expected rate of return curve on R&D to the: A) right and reduce its optimal amount of R&D. C) left and increase its optimal amount of R&D. B) right and increase its optimal amount of R&D. D) left and reduce its optimal amount of R&D. Answer: B

Type: C Topic: 9 E: 490 MI: 246 88. Suppose that a firm's legal staff concludes that a new product which a firm is developing is patentable. Graphically, this new information would shift the firm's expected rate of return curve on R&D to the: A) right and reduce its optimal amount of R&D. C) left and increase its optimal amount of R&D. B) right and increase its optimal amount of R&D. D) left and reduce its optimal amount of R&D. Answer: B

Type: A Topic: 9 E: 493 MI: 249 89. 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. Answer: A

Type: D Topic: 9 E: 493 MI: 249 90. Legal protections against direct copying of written material are called __________; legal protections against using a product's name are called __________. A) patents; trademarks. B) trademarks, patents. C) copyrights, trademarks. D) copyrights; patents. Answer: C

Type: A Topic: 9 E: 493-494 MI: 249-250 91. Even where imitation is possible, a firm may gain advantage from being the first to introduce an innovative product because of: A) long-lasting brand-name recognition. B) a time lag between innovation and imitation by rivals. C) trade secrets that limit the ability of rivals to imitate the product. D) all of the above. Answer: D

Type: A Topic: 9 E: 493-494 MI: 249-250 92. Firm X develops a new product and gets a head start in its production. Other firms try to produce a similar product but discover they have higher average total costs than the existing firm. This situation illustrates: A) diseconomies of scale. C) learning-by-doing. B) diminishing marginal returns. D) spillover costs. Answer: C

Type: A Topic: 9 E: 494 MI: 250 93. Small innovative firm X that has developed a new product accepts an offer to be acquired by a larger firm. As it relates to new technology, this behavior or outcome is known as a: A) fast-second strategy. B) limit pricing. C) zero-sum game. D) a buyout. Answer: D

Role of market structure Type: A Topic: 10 E: 495-496 MI: 251-252 94. Which of the following supports of the contention that pure competitors have a weak incentive to engage in R&D? A) Entry to purely competitive industries is easy and thus profit from innovation is quickly competed away. B) In pure competition, products are already highly differentiated. C) Most purely competitive industries are increasing-cost industries. D) Pure competitors are happy to earn only a normal profit. Answer: A

Type: A Topic: 10 E: 495-496 MI: 251-252 95. Which of the following supports the contention that pure competitors have a strong incentive to engage in R&D? A) Entry to purely competitive industries is easy and thus profit from innovation is quickly competed away. B) Pure competitors cannot risk being complacent about innovation, since a new product, production technique, or distribution method could undermine their normal profit and drive them out of the market. C) Most purely competitive industries are increasing-cost industries. D) Pure competitors are happy to earn only a normal profit. Answer: B

Type: A Topic: 10 E: 496 MI: 252 96. Which of the following supports the contention that monopolistic competitors have a strong incentive to engage in R&D? A) Entry to monopolistic competitive industries is relatively easy and thus profit from innovation is quickly competed away. B) Most monopolistic competitive industries are decreasing cost industries. C) The desire to differentiate products from competitors may motivate monopolistic competitors to engage in R&D. D) Monopolistic competitors have large retained earnings that are available to finance R&D. Answer: C

Type: A Topic: 10 E: 496 MI: 252 97. 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. Answer: A

Type: A Topic: 10 E: 496 MI: 252 98. Economists who contend that oligopolists have a strong incentive to engage in R&D say that: A) the undistributed profits of oligopolists give them a source of readily available, relatively low cost funds for financing R &D. B) entry barriers enable oligopolists to sustain the profit it gains from innovation. C) the large size of oligopolists' R&D departments allow them to use very specialized, expensive R&D equipment and employ teams of specialized researchers. D) all of the above are true. Answer: D

Type: A Topic: 10 E: 496 MI: 252 99. Those who contend that oligopolists are less likely than more competitive firms to engage in R&D say that: A) Oligopolists have little incentive to introduce costly new technology and produce new products when they currently are earning large economic profit using existing technology and selling existing products. B) the undistributed profits of oligopolists give them a source of readily available, relatively low cost funds for financing R &D. C) entry barriers enable oligopolists to sustain the profits they gain from innovation. D) the large size of oligopolists' R&D departments allow them to use very specialized, expensive R&D equipment and employ teams of specialized researchers. Answer: A

Type: A Topic: 10 E: 496 MI: 252 100. Which of the following market structures do economists generally agree is the least conducive to R&D and innovation? A) monopolistic competition B) pure competition C) pure monopoly D) oligopoly Answer: C

Inverted-U theory; role of scientific opportunity Type: A Topic: 11 E: 497-498 MI: 253-254 101. 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. Answer: D

Type: D Topic: 11 E: 497-498 MI: 253-254 102. 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. C) bell-shaped curve. B) average product of R&D theory. D) theory of increasing and diminishing returns. Answer: A

Type: A Topic: 11 E: 498 MI: 254 103. Which of the following ideas most directly relates to R&D expenditures? A) increasing cost industries. B) inverted-U theory. C) a cartel. D) kinked-demand curve. Answer: B

Type: C Topic: 11 E: 497 MI: 253 104. In the inverted-U theory, which of the following industry concentration ratios would be most conducive to R&D (as a percentage of firm sales)? A) 1 percent. B) 10 percent. C) 50 percent. D) 70 percent. Answer: C

Type: C Topic: 11 E: 497 MI: 253 105. Industry A has a 60 percent concentration ratio, while industry B has a 40 percent concentration ratio. According to the inverted-U theory, all else equal, we can conclude that: A) Industry A will be more technologically progressive than B. B) Industry C with a 10 percent concentration ratio will be more progressive than either industry A or B. C) Industry D with a 80 percent concentration ratio will be more technologically progressive than either industry A or B. D) that none of the above are necessarily true. Answer: D

Type: A Topic: 11 E: 497 MI: 253 106. Which among the following is the strongest determinant of an industry's technological progressiveness? A) the scientific character of its industry and the number of technological opportunities available B) the size of the industry concentration ratio; the lower the ratio, the greater the firm's technological progressiveness C) the Herfindahl index in the firm's industry; the higher the index value, the greater the firm's technological progressiveness D) the amount of retained earnings in the industry Answer: A

Type: A Topic: 11 E: 497 MI: 253 107. In general, the: A) number of firms in the industry is far more important than the industry's scientific character and extent of technological opportunities. B) greater is an industry's concentration ratio, the higher its R&D expenditures in relation to sales. C) industry's scientific character and extent of technological opportunities often is more important than the industry's concentration ratio. D) higher the industry's interest cost of borrowing funds for R&D, the greater is the industry's progressiveness. Answer: C

Technological advance and efficiency Type: A Topic: 12 E: 498 MI: 254 108. Technological advance improves productive efficiency by: A) lowering average total cost. C) enhancing monopoly power. B) increasing marginal utility. D) decreasing a nation's exports. Answer: A

Type: A Topic: 12 E: 498 MI: 254 109. Technological advance improves allocative efficiency by: A) enhancing monopoly power. B) reducing income inequality. C) giving society a more-preferred mix of goods and services. D) encouraging saving. Answer: C

Type: D Topic: 12 E: 499 MI: 255 110. The process by which new firms and new products replace existing dominant firms and products is called: A) monopolistic competition. C) process innovation. B) the inverted-U process. D) creative destruction. Answer: D

Type: D Topic: 12 E: 499-500 MI: 255-256 Status: New 111. Creative destruction is: A) the process by which large firms buy up small firms. B) the process by which new firms and new products replace existing dominant firms and products. C) a term coined many years ago by Adam Smith. D) is applicable to planned economies, but not to market economies. Answer: B

Type: F Topic: 12 E: 499 MI: 255 112. The theory of creative destruction was advanced many years ago by: A) Rocky Balboa. B) John Maynard Keynes. C) Joseph Schumpeter. Answer: C

D) Adam Smith.

Type: A Topic: 12 E: 500 MI: 256 113. Creative destruction is not automatic because: A) there are major obstacles to the entry of new innovative firms into concentrated industries. B) consumer tastes are highly unstable. C) corporate takeovers increase dynamic competition. D) large firms rarely are technologically progressive. Answer: A

Consider This Questions Type: D E: 494 MI: 250 Status: New 114. (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. Answer: D

Type: D E: 494 MI: 250 Status: New 115. (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." Answer: C

Last Word Questions Type: A E: 498-499 MI: 254-255 116. (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. Answer: C

Type: A E: 498-499 MI: 254-255 117. (Last Word) Construction of the first working computer "mouse" best exemplifies: A) invention. B) scientific determinism. C) diffusion. D) creative destruction. Answer: A

Type: A E: 498-499 MI: 254-255 118. (Last Word) In 1995 Microsoft released its Windows 95 operating system which was a far better system than the Microsoft system it replaced. Microsoft's Window 95 best illustrates: A) innovation. B) scientific determinism. C) venture capitalism. D) creative destruction. Answer: A

True/False Questions Type: D E: 484 MI: 240 119. Technological advance includes new and improved products, new and improved production techniques, and new and improved distribution methods Answer: True

Type: D E: 485 MI: 241 120. Innovation is the first discovery of a new product or production process; invention is the first successful commercial introduction of the product or process. Answer: False

Type: D E: 485 MI: 241 121. 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. Answer: False

Type: D E: 488 MI: 244 122. Venture capital is another name for retained earnings. Answer: False

Type: A E: 488 MI: 244 123. The marginal cost to a firm of R&D expenditures is the market interest rate the firm must pay to obtain the needed financing. Answer: True

Type: A E: 489 MI: 245 124. A firm should undertake all the R&D activity that it can afford. Answer: False

Type: A E: 489 MI: 245 125. A firm's optimal amount of R&D occurs where the marginal benefit of this activity exceeds marginal cost by the greatest amount. Answer: False

Type: A E: 490 MI: 246 126. A firm's optimal amount of R&D occurs where the interest-rate cost of funds and the expected rate of return are equal. Answer: True

Type: A E: 491 MI: 247 127. Successful new products enable consumers to increase the total utility they obtain from a specific amount of their total spending. Answer: True

Type: A E: 491-492 MI: 247-248 128. Process innovation is represented as a downshift in a firm's total product curve and its average total cost curve. Answer: False

Type: D E: 496-497 MI: 252-253 129. The theory that R&D expenditures as a percentage of firms' sales first rise, reach a peak, and then fall with increases in industry concentration is called the inverted-U theory. Answer: True

Type: D E: 499 MI: 255 130. The process by which new firms and new products destroy existing dominant firms and their products is called creative destruction. Answer: True