investment that pays at least a 6% return to the Gizmo Company will pay at least an 11% return for society

as a whole; an investment that pays at least 7% for the Gizmo Company will pay at least 12% for society as

a whole, and so on. Answer the questions that follow based on this information.

Estimated Rate of Return Private profits of the firm from an R&D project (in $ millions)

10%

9%

8%

7%

6%

5%

4%

3%

TABLE 13.4

$100

$102

$108

$118

$133

$153

$183

$223

a.

If the going interest rate is 9%, how much will Gizmo invest in R&D if it receives only 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 the social

benefits of its investment? (Add an additional 5% return on all levels of investment.)

4. The Junkbuyers Company travels from home to home, looking for opportunities to buy items that would
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