A drug company is deciding how much to invest in Research an…
A drug company is deciding how much to invest in Research and Development into finding a cure for diabetes. The table below shows the company’s demand for financial capital for R&D based on its expected rates of return from selling the cure. Every investment provides an additional 4% social return: that is, an investment that pays at least a 5% return to the drug company will create at least a 9% return for society as a whole. Estimated Rate of Return_____________________ Value of R&D Projects That Provide at Least This High a Private Rate of Return to the Drug Company (measured in millions of dollars) 10% $2209% $2288% $2387% $2506% $2645% $2804% $2983% $308 If the opportunity cost of financial capital for the drug company is 7%, the drug company will invest in R&D if it receives only the private benefits of this investment.