1. The inverted-U theory suggests that R&D expenditures as a percentage of sales
ID: 1116867 • Letter: 1
Question
1. The inverted-U theory suggests that R&D expenditures as a percentage of sales rise with industry concentration until the four-firm concentration ratio reaches about
30 percent, suggesting that small firms are more responsible for significant R&D expenditures.
50 percent, suggesting that monopolies are not responsible for significant R&D expenditures.
50 percent, indicating that R&D expenditures occur in all types of industry structures.
90 percent, suggesting that most R&D expenditures occur in industries that are not monopolized.
2. An oligopoly structure might be more favorable to R&D spending and innovation than either pure competition or pure monopoly because firms in this type of industry are
large in size and there are barriers to entry. These can lower per-unit production costs and help to keep some of the profits of innovation.
small in size and more responsive to market conditions.
large in size and there are barriers to entry. These can increase per-unit production costs and help to keep some of the profits of innovation.
3. Neither pure competition nor pure monopoly is very conducive to a great deal of R&D spending and innovation because for competitive firms,
profit rewards from innovation may be exaggerated by existing or entering firms, while monopolies have little market power, which creates an incentive to engage in R&D.
profit rewards from innovation may be diminished by existing or entering firms, while monopolies have market power, which creates a disincentive to engage in R&D.
the large number of firms makes it difficult to identify a useful R&D project, while monopolies have no other firms to collaborate with.
the expected rate of return on R&D may be low or even negative, while for monopolies there is little means to engage in R&D.
able to collude and take advantage of shared information.
Explanation / Answer
1. The right answer is option 2. 50 percent, suggesting that monopolies are not responsible for significant R&D expenditures.
Explanation: The inverted -U theory explains the relationship between industry concentration and the R&D expenses as a percentage of sales in an industry. It shows that R&D expenditure, as a % of sales, becomes maximum when the four-firm concentration ratio is 50%. This shows that R&D expenditure is low when there is very low industry concentration (perfect competition) or very high industry concentration (monopoly).
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