A Health Research company faces a cost of borrowing of 7%. If the firm receives...
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A Health Research company faces a cost of borrowing of 7%. If the firm receives only the private benefits of investing in R&D, then we show its demand curve for financial capital by DPrivate, as depicted in the table below. Because there are spillover benefits, society would find it optimal to have more investment. If the firm could keep the social benefits of its investment for itself, its demand curve for financial capital would be social and it would willing to borrow more money to do so. With the data below draw the private demand curve and the social demand curve and the borrowing costs as a horizontal line. Now determine both the amount of financial capital that would be invested if the firm were only considering its private benefit and the amount that would be undertaken if the firm took into account the social benefit that would result from the research.
Rate of Return
DPrivate (in millions)
DSocial (in millions)
Borrowing Cost
3%
$92
$104
7%
5%
$72
$92
7%
7%
$52
$82
7%
9%
$42
$72
7%
11%
$32
$64
7%
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