Economics (McConnell), AP* Edition, 20th Edition

Chapter 13W : Technology, R&D, and Efficiency

*Fill in the Blanks

1.

Technological advance is a three-step process of
a.
b.
c.
2.

The first discovery of a product or process is (innovation, invention) , whereas the first commercial introduction of a new product or process is (innovation, invention) ; patent protection is available for (invention, innovation) but not (invention, innovation) . The spread of an innovation through imitation or copying is (trademarking, diffusion) .
3.

The development of new or improved products is (process, product) innovation; the development of new or improved production or distribution methods is (process, product) innovation.
4.

The traditional view of technological advance was that it was (internal, external) to the economy, but the modern view is that technological advance is (internal, external) . In the modern view, technological advance arises from (scientific progress, rivalry among firms) , but the traditional view holds that it arises from (scientific progress, rivalry among firms) that is largely (internal, external) to the market system.
5.

The individual who is an initiator, innovator, and risk bearer who combines resources in unique ways to produce new goods and services is called an (entrepreneur, intrapreneur) , but an individual who promotes entrepreneurship within existing corporations is called an (entrepreneur, intrapreneur) . Entrepreneurs tend to form (large, small) companies called startups, and if they are successful they will receive (large, small) monetary rewards.
6.

Past successes often give entrepreneurs access to (more, less) resources for further innovation because the market economy (punishes, rewards) those businesses that meet consumer wants.
7.

To earn the greatest profit from R&D spending, the firm should expand the activity until its marginal benefit is (greater than, less than, equal to) its marginal cost, but a firm should cut back its R&D if its marginal benefit is (greater than, less than, equal to) its marginal cost.
8.

Five ways a firm can obtain funding to finance R&D spending are
a.
b.
c.
d.
e.
9.

Product innovation will tend to increase a firm's profit by increasing the (costs, revenues) of the firm; process innovation will tend to increase a firm's profit by reducing the (costs, revenues) of the firm.
10.

Consumer acceptance of a new product depends on its marginal utility (and, or) its price. The expected return that motivates product innovation (is, is not) always realized. Most product innovations are (major, minor) improvements to existing products.
11.

Process innovation results in a shift (downward, upward) in the firm's total product curve and a shift (downward, upward) in the firm's average-total-cost curve, which in turn (increases, decreases) the firm's profit.
12.

The imitation problem occurs when rivals of a firm copy or emulate the firm's product or process and thus (increase, decrease) the innovator's profit from the R&D effort. When a dominant firm quickly imitates the successful new product of smaller competitors with the goal of becoming the second firm to adopt the innovation, it is using a (second-best, fast-second) strategy.
13.

An example of legal protection for taking the lead in innovation would be (copyrights, trade secrets) , but a nonlegal advantage might come from (patents, learning by doing) .
14.

In regard to R&D, purely competitive firms tend to be (less, more) complacent than monopolists, but the expected rate of return for a pure competitor may be (high, low) , and they (may, may not) be able to finance R&D.
15.

Monopolistically competitive firms have a (weak, strong) profit incentive to develop and differentiate products, but they have (extensive, limited) ability to obtain inexpensive R&D financing, and it is (difficult, easy) for these firms to extract large profits because the barriers to entry are relatively (high, low) .
16.

The size of oligopolistic firms makes them (capable, incapable) of promoting technological advance, but there is (much, little) reason for them to introduce costly new technology and new products when they earn (small, large) economic profit without doing it.
17.

Pure monopoly has a (strong, weak) incentive to engage in R&D because its high profit is protected by (low, high) barriers to entry. This type of firm views R&D spending as (an offensive, a defensive) move to protect the monopoly from new products that would undercut its monopoly position.
18.

Inverted-U theory suggests that R&D effort is at best (strong, weak) in industries with very low and very high concentrations. The optimal industry structure for R&D is one in which expected returns on R&D spending are (low, high) and funds are readily available and inexpensive to finance R&D. This generally occurs in industries with (many, a few) firms that are absolutely and relatively large, but the concentration ratio is not so high as to limit strong competition by smaller firms.
19.

Technological advance increases the productivity of inputs, and by reducing average total costs it enhances (allocative, productive) efficiency; when it gives society a more preferred mixture of goods and services it enhances (allocative, productive) efficiency. The efficiency gain from innovation can be (increased, decreased) if patents and the advantages of being first lead to monopoly power, but it can be (increased, decreased) if innovation provides competition where there was none.
20.

Innovation may foster creative destruction, where the (destruction, creation) of new products and production methods simultaneously leads to the (destruction, creation) of the monopoly positions of firms committed to existing products and methods. Another view, however, suggests that creative destruction (is, is not) automatic. In general, innovation improves economic efficiency, but in some cases it can increase monopoly power.
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