The economy must always lie along LL, with spending rising above IIII and falling below
this line. For any initial value of E below that labelled E, spending eventually falls to
zero, a violation of the transversality condition. For initial values of E above I?, L
approaches zero at a point where the level of spending implies expected profits in excess
of R&D costs. This event would contradict profit maximization by entrepreneurs. We
conclude that the economy must jump immediately to the steady state at point A. The
equilibrium values of E and L solve (10) and (11).
In