Business in the

Market Economy 5
Multiple Choice
1 C 6 C* 11 C
2 B 7 A* 12 C
3 C 8 D 13 A
4 D 9 A 14 C
5 A 10 B 15 D
*Indicates that an enhanced answer has been provided in the section below.

Enhanced Answers
6 C Productivity rates:
12
March: =2
6
9
June: = 1.3
7
16
September: = 1.78
9
15
December: = 1.88
8
Therefore, productivity is highest in June, as one unit of output (that is, completing one tax
return) only takes 1.3 hours. The lower the number of hours taken to produce one unit of
output, the higher the level of productivity.

(6 × 200)
7 A March: = $100 p/h
12
(7 × 100)
June: = $77.78 p/h
9
(9 × 130)
September: = $73.13 p/h
16
(8 × 105)
December: = $56 p/h
15
Therefore, March is Vini’s most successful month with respect to hourly pay.

Short Answers
Question 1

(a) The change in output as a result of employing one more unit of labour.

(b) Employing more labour may allow some workers to specialise in certain tasks, other workers
in other tasks. They may become more skilled and complete their tasks more efficiently, thus
increasing the marginal productivity of labour for the firm.

Copyright © Pearson Australia 2020 | The Market Economy Workbook – Eighth Edition 9781488626654 1

M05_TME2020_WB_02_26654_answers.indd 1 18/10/19 11:20 am

 The Market Economy Eighth Edition Workbook  Chapter 5: Business in the Market Economy

(c) After 5 units, marginal productivity of labour starts to decline, from a peak of 240 units per
worker.

(d) The firm’s long-run average cost curve would be a U-shaped curve. This suggests that each
unit of labour employed initially produces a more than proportionate production outcome.
However, once the firm employs 5 units of labour the marginal productivity of labour begins to
decrease as labour units increase. This could be the case because there are production
bottlenecks, or because too much specialisation of labour can result in individual worker’s
tasks becoming dull and repetitive, so that they lose motivation and become less productive.
Management problems may also emerge with large scale production.

(e) A decline in the price of capital relative to that of labour is one factor that could see a firm use
a higher proportion of capital in production. Such a decline would reduce the total costs
incurred by a firm if it was to substitute more capital for labour resources and would make it
more profitable to use a greater proportion of capital in production. Another cause of such a
change would be a decline in the quality and skills of the labour force or technological
advancements in automated production processes. This would increase the efficiency and
productivity of capital relative to that of labour, and hence, make it more profitable for a firm
to substitute capital for labour.

Question 2

(a) One way a government can support business growth is to subsidise businesses in certain
industries, particularly when there is potential for short-term subsidies to help provide an
opportunity for lasting growth such as dealing with one-off market entry or other costs. For
example, Austrade provides Export Market Development Grants (EMDG) to help Australian
businesses export. Ultimately, this generates more income for Australian businesses and
supports growth in industry. Another way a government can support business growth is to
invest in research and development on behalf of businesses in order to allow industry
participants to adopt more productive processes. In addition, initiatives such as reducing
taxation rates or offering tax concessions to businesses in certain industries may encourage
investment and growth.

(b) Environmental sustainability involves preserving the natural environment through minimising
pollution and waste and using renewable energy sources. As a result, business activities and
processes may be altered, for example, to limit the use of raw materials, pollution and
greenhouse gases, in response to consumer demand, government regulation or a greater
commitment to ethical decision-making.

(c) In general, producing more goods and services with existing resources (lifting productivity)
increases living standards. Firstly, this is because there is less wastage of scarce resources
within an economy as resources are now being used more efficiently. Secondly, living
standards improve from a lower inflation rate, as due to lower production costs, firms can
increase profits without raising the price of the goods they produce and may even be able to
lower prices.

(d) Two industries that have been particularly affected by the increased importance of corporate
social responsibility are mining and professional sports. In mining, beyond what is legally
required by environmental and planning laws, companies are expected to practice and report
on ways in which they are acting responsibly, such as by investing in local infrastructure to
reduce reliance on fly-in fly-out workers to regional mining towns. Professional sporting
organisations are expected to have codes of behaviour and enforcement processes for
players, reflecting the role of elite athletes as role models who are influential in the community.

Question 3

(a) Internal economies of scale are the cost saving advantages that result from a firm expanding
its scale of operations. They occur when a firm’s output level is below the technical optimum.

(b) The technical optimum is the most efficient level of production for a firm. At this point, average
costs of production are at the lowest possible level. This is the point where the firm has taken
maximum advantage of internal economies of scale, without having to suffer excessive internal
diseconomies of scale. In general, a firm should always aim to continue to produce up to the
technical optimum, however, never past it, as this will lead to internal diseconomies of scale.

Copyright © Pearson Australia 2020 | The Market Economy Workbook – Eighth Edition 9781488626654 2

M05_TME2020_WB_02_26654_answers.indd 2 18/10/19 11:20 am

 The Market Economy Eighth Edition Workbook  Chapter 5: Business in the Market Economy

(c) The implementation of technology can be very beneficial to a business. A business that invests
in technology is likely to be able to offer better quality products at a lower price as technology
can assist in making production more accurate and efficient. Moreover, by using the latest
technology, businesses are able to better respond to changes in market demand and to the
specific needs of consumers. As a result, this fuels greater demand for a firm’s good or service
which leads to a higher level of output and increased profitability. Conversely, two drawbacks
of implementing technology on a firm’s operations should be noted. Firstly, in the short term,
a business must be willing to make a substantial investment in technology, not only from
buying the technology, but, training staff on how to use it. Secondly, as with any new
development, there are risks and vulnerabilities from using technology.

(d) Productivity refers to the quantity of goods and services a firm can produce with a given
amount of resources, per unit of time, whereas, production simply refers to the total amount
of goods and services produced. Increasing productivity is desirable as it means a business
is using its limited resources more efficiently and can satisfy a greater number of wants with
the same level of resources. The key distinction between productivity and production is that
increasing productivity requires more than merely an increase in production, rather, a firm
needs to increase production proportionately more than the increase in inputs of resources.
For example, if a fast-food restaurant is able to triple the amount of cheeseburgers produced
with double the amount of labour used, then an increase in productivity has been achieved.

Skills Revision

Scenario Will a firm INCREASE or

DECREASE production?

Market research identifies that consumer demand is growing Increase

A new source of natural resources is discovered Increase
The introduction of artificial intelligence reduces production costs Increase
ABS data reveals the population is rapidly growing Increase
Reduced availability of storage space Decrease
The retirement age is lowered Decrease
The economy experiences a recession Decrease
The economy experiences a boom Increase

Example Specialisation of Labour, Natural

Resources or Capital?
A car manufacturer utilises an advanced automated laser paint gun
Capital
that applies perfect coats of paint to all cars
A fast-food restaurant only trains workers to be proficient in one
Labour
aspect of food production
A number of small IT firms decide to rent a large building space
Natural Resources
nearby a major power station
A large bank increases the number of job departments and job
Labour
titles, preferring staff to work longer on a smaller amount of tasks
A group of businesses submit a joint tender to build factories next
Natural Resources
to a major highway
A growing construction company implements a new cutting
machine that automatically cuts pieces of timber ready for Capital
installation

Copyright © Pearson Australia 2020 | The Market Economy Workbook – Eighth Edition 9781488626654 3

M05_TME2020_WB_02_26654_answers.indd 3 18/10/19 11:20 am