Final answer:
The economics of R&D investing is discussed with Big Drug Company's example, highlighting the difference between private demand for financial capital, represented by the Dprivate curve, and social demand, represented by the Dsocial curve, due to spillover benefits.
Step-by-step explanation:
The topic at hand is the economics of research and development (R&D) budgeting within a firm, specifically looking at the example of Big Drug Company. The company must decide on its R&D expenditures by considering the potential rates of return on various projects. The Dprivate curve represents the company's demand for financial capital to support R&D projects at differing interest rates. When accounting for spillover benefits that R&D can provide to broader society, a new demand curve, called Dsocial, can be constructed, which lies above the Dprivate curve, indicating a higher level of optimal investment in R&D from a societal perspective.
Big Drug faces an 8% cost of borrowing, which sets its Dprivate equilibrium at $30 million in R&D investment. However, due to the societal spillover benefits, the optimal investment level is actually $52 million, as represented by the Dsocial curve. The firm's R&D investment has broader implications than its own financial returns, thus the difference in these two curves demonstrates the discrepancy between private incentives and social interest.