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2. The Gizmo Company is planning to develop new household gadgets. Refer to the Table on the next page which shows the company's demand for
2. The Gizmo Company is planning to develop new household gadgets. Refer to the Table on the next page which shows the company's demand for financial capital for research and development of these gadgets, based on expected borrowing interest rates. If there is a social benefit, the spillover effect would add 5% to the rate of return. a. If the going interest rate is 9%, how much will Gizmo invest in R&D if it receives the private benefits of this investment? b. Assume that the interest rate is still 9%. How much will the firm invest if it also receives social benefits from its investment? (effectively, the cost of borrowing will go down by 5%, due to the rate of return from the social benefit)
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