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Chapter 13: Q.2 (page 315)

Suppose that Sony's R&D investment in digital devices has increased profits by 20%. Is this a private or social benefit?

Short Answer

Expert verified

The 20% increased profits is a personal benefit.

Step by step solution

01

Content Introduction

The benefits that a consumer of a product or service receives, or the benefits or procedures that a company invents and captures, are referred to as private benefit. On the other hand, social benefit is the total of private and external benefits.

02

Content Explanation

It is clear that Sony is profiting from the investment. As a result, the 20% rise in profits is a private gain. Sony's investment will be regarded a social benefit if it is not able to collect all of the benefit, perhaps because other corporations swiftly imitate and make close replacements.

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Most popular questions from this chapter

Why is a football game on ESPN a quasi-public

good but a game on the NBC, CBS, or ABC is a public good?

In what ways do company investments in research and development create positive externalities?

Will the demand for borrowing and investing in R&D be higher or lower if there are no external benefits?

HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like engine and luggage placement, and the most efficient shape of the plane for moving through the air. HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates of how these approaches would affect the plane's operating costs and ticket sales. Based on these estimates, Table 13.5 shows the value of R&D projects that provide at least a certain private rate of return. Column 1 = Private Rate of Return. Column 2 = Value of R&D Projects that Return at Least the Private Rate of Return to HighFlyer Airlines. Use the data to answer the following questions.

Private rate of returnValue of R&D
12%\(100
10%\)200
8%\(300
6%\)400
4%$500

a. If the opportunity cost of financial capital for HighFlyer Airlines is 6%, how much should the firm invest in R&D?

b. Assume that the social rate of return for R&D is an additional 2% on top of the private return; that is, an R&D investment that had a 7% private return to HighFlyer Airlines would have a 9% social return. How much investment is socially optimal at the 6% interest rate?

Can a company be guaranteed all of the social

benefits of a new invention? Why or why not?
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