One of the results of Paul Romer's new growth theory is that investment in research and development will be too low in an economy. Explain how he comes to this conclusion
What will be an ideal response?
According to Romer, knowledge capital is a key determinant of economic growth. Firms contribute to an economy's knowledge capital by conducting research and development. But there is a problem. Knowledge capital is nonrival in that if one firm uses it, it does not prevent another firm from using it. Also knowledge capital is nonexcludable because if one firm gets it, all other firms get it too. That is, once the formula for a drug is known, it becomes widely available for other firms to use. If this is the case, when one firm invents a drug, once the formula for the drug is known, other firms cannot be prevented from benefiting from the research and development they did not pay for. These firms have the incentive to free ride. If this is the case, the original firm inventing the formula cannot capture all the benefits of the formula. Some of the marginal benefits will go to other firms. If this is the case, the firm will choose the amount of research and development equal to the amount that will equate the marginal costs and the marginal benefits for the firm. Since the marginal benefits to the firm will be low, then the firm will not invest enough in research and development.
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When an inverse relationship is graphed, the resulting line or curve is:
A. horizontal. B. vertical. C. upward-sloping. D. downward-sloping.
Recall the Application about the effect of global warming on economic growth to answer the following question(s). According to this Application, a study of municipalities in Latin and South America found that a one degree Celsius rise in temperature was associated with:
A. no measurable change in per capita income. B. a small decline in real income and a small increase in per capita real income. C. a slight increase in municipal per capita income. D. a decline in municipal per capita income.
An advantage of the personal consumption expenditures price index (PCE) over the Consumer Price Index (CPI) as a measure of inflation is that the PCE
A) includes the prices of more consumer goods and services. B) includes the prices of consumer goods, but not consumer services. C) includes the prices of consumer services, but not consumer goods. D) is a fixed market-basket price index that does not allow the mix of products to change each year.
A ________ is nonrival in consumption and listeners are nonexcludable.
A. concert at a local indoor arena B. satellite radio signal C. lecture in your college's auditorium D. radio signal broadcast through the air