Economics 251 – Review Questions
Chapter 26 – Technology, R& D, and Efficiency
(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.
(2) Technological advance is a three-step process involving:
(a) invention, duplication, and diffusion.
(b) duplication, innovation, and diversity.
(c) invention, innovation, and diffusion.
(d) necessity, invention, and solution.
(3) As pizza topped with barbeque chicken became popular at specialty restaurants, Pizza Hut introduced a similar pizza. This imitation illustrates:
(a) innovation.
(b) invention
(c) creative destruction.
(d) diffusion.
(4) 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.
(5) The major
source of new scientific knowledge in the
(a) university and government research.
(b) R&D work in large corporations.
(c) entrepreneurs working alone.
(d) purely competitive and monopolistically competitive firms.
Use Table 1 to answer Questions (6) and (7).
Table 1
R&D
Expected rate (millions Interest rate cost
of return (%) of dollars) of funds (%)
25 20 10
20 40 10
15 60 10
10 80 10
5 100 10
(6) Referring to Table 1, the firm’s optimal amount of R&D spending is:
(a) $20 million.
(b) $40 million.
(c) $60 million.
(d) $80 million.
(7) Referring to Table 1, 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 in not spending enough funds on R&D.
(8) Process innovation refers to:
(a) the 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.
(9) Gigantic Corporation follows a strategy of waiting for rivals to innovate, then quickly imitating any successful innovations. This behavior is known as:
(a) collusion.
(b) an entrepreneurial strategy.
(c) a fast-second strategy.
(d) pricing the demand curve.
(10) Other things being equal, trademarks and brand names:
(a) increase the interest cost of funds used to finance R&D expenditures.
(b) decrease the interest 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.
Use Figure 1 to answer Questions (11) and (12).
Figure 1
(11) In Figure 1, the optimal amount of R&D is:
(a) $0 million
(b) $20 million.
(c) $50 million.
(d) $60 million.
(12) In Figure 1, if the firm’s management chose to spend $20 million on R&D,
(a) the firm not spending enough on R&D.
(b) the firm is spending too much on R&D.
(c) the firm is spending the right amount of funds on R&D.
(d) None of the above is true.
(13) Which of the following supports 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.
(14) Creative destruction is:
(a) the process by which large firms buy up small firms.
(b) the process by which new firms and products replace existing dominant firms and products.
(c) a term coined many years ago by Adam Smith.
(d) is applicable of planned economies, but not to market economies.
Utilize Figure 2 to answer Question (15).
Figure 2
(15) In Figure 2, which of the following would shift the average total cost from from Average Total Cost (1) to Average Total Cost (2)?
(a) An increase in the cost of a key component in producing the product.
(b) A decrease in the incomes of the firm’s customers.
(c) An improved production method that shifts the firm’s total product curve upward.
(d) An increase in the firm’s market price for its product.
(16) 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) Mostly purely competitive industries are increasing-cost industries.
(d) Pure competitors are happy to earn only a normal profit.
(17) Which of the following supports the contention that monopolistic competitors have a strong incentive to engage in R&D?
(a) Entry to monopolistically competitive industries is relatively easy and thus profit from innovation is quickly competed away.
(b) Most monopolistically 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 do not have sufficient profits to engage in R&D.
(18) Those who contend that oligopolists are less likely than competitive firms to engage in R&D say that:
(a) oigopolists 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 oligopolist’s R&D departments allow them to use very specialized, expensive R&D equipment and employ teams of specialized researchers.