Describe how a firm’s revenues and profits are increased through product innovation. What three other points should be noted about these results?
What will be an ideal response?
Technological change can increase a firm’s profit by increasing revenues through product innovation. From a utility perspective, consumers will purchase a new product only if it increases total utility from their limited income. The purchases of the product increase the firm’s revenues.
Three other points are noteworthy about these results. First, consumer acceptance of a new product depends on both its marginal utility and its price. To be successful, a new product must not only deliver utility to the consumer but do so at an acceptable price. Second, many new products are not successful, so the firm may fail to realize the expected return. Third, most product innovations are small or incremental improvements to existing products and not major changes.
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As the expected future spot rate moves closer to the spot rate, uncovered interest parity indicates that:
a. interest rates should remain constant. b. interest rates should converge. c. interest rates should diverge. d. The answer depends on whether the expected future spot rate is higher or lower than the spot rate.
As the general price level in the country of Norweinshire rose, the average interest rate in the economy increased, thereby lowering aggregate expenditure. This relationship between price level, interest rate, and aggregate expenditure is referred to as the:
a. total price effect. b. interest rate effect. c. wealth effect. d. real-balance effect. e. income effect.