BL 4 Business Environment

PRACTICE & REVISION KIT
CA SRI LANKA CURRICULUM 2020

First edition 2020
ISBN 9781 5097 3133 6
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ii
Contents
Page
Question Index iv
Introduction vi
How to use this Practice & Revision Kit vii
Format of the exam ix
Exam techniques x
Action verbs xi
Questions 3
Answers 77
Mock Exam Questions 123
Mock Exam Answers 141
Appendix
iii
Contents
Question index
Page
Title
Question Answer
Part A: Business and Organisational Environment
1 Introduction to organisational environment 3 77
Part B: Nature and Scope of Business Management
2 Business management 12 82
Part C: Functions of Management
3 Planning and control 15 83
4 Organising 16 83
5 Leadership, motivation and communication 21 86
Part D: Functional Areas of Business
6 Operations management 27 89
7 Marketing management 29 90
8 Human resources management 34 92
9 Information management systems and project 36 93
management
Part E: Role of Economics in Business
10 Economics in business 42 96
Part F: Price Mechanism and Competitive Markets
11 Demand, supply and market equilibrium 44 97
12 Demand and supply analysis 50 100
Part G: Production, Cost, Price and Output Decisions
13 Production and cost functions 54 105
14 Profit maximisation 58 107
iv
Business Environment and Economics
Page
Title
Question Answer
Part H: Macroeconomic Environment and Business
15 Macroeconomic forces and business decisions 60 109
16 Inflation 62 111
17 Exchange rates in competitive markets 63 112
18 Monetary and Fiscal Policy 70 118
Mock exam 127 123
v
Question Index
Introduction
Welcome to this Practice & Revision Kit for the Institute of Chartered Accountants of
Sri Lanka professional examinations for curriculum 2020.
One of the key criteria for achieving exam success is question practice. There is
generally a direct correlation between candidates who revise all topics and practise
exam questions and those who are successful in their real exams. This Practice &
Revision Kit gives you ample opportunity for such practice in the run up to your
exams.
The Practice & Revision Kit is structured to follow the modules of the Study Text and
comprises banks of objective test questions. Suggested solutions to all questions are
supplied.
We welcome your feedback. If you have any comments about this Practice &
Revision Kit, or would like to suggest areas for improvement, please e-mail
learningdevelopment@casrilanka.org.
Good luck in your exams!
BPP LEARNING MEDIA
vi
How to use this Practice & Revision Kit
This Practice & Revision Kit comprises banks of practice questions of the style that
you will encounter in your exam. It is the ideal tool to use during the revision phase of
your studies.
Questions in your exam may test any part of the syllabus so you must revise the
whole syllabus. Selective revision will limit the number of questions you can answer
and hence reduce your chances of passing. It is better to go into the exam knowing a
reasonable amount about most of the syllabus rather than concentrating on a few
topics to the exclusion of the rest. You should at all costs avoid falling into the trap of
question spotting, that is trying to predict what are likely to be popular areas for
questions, and restricting your revision and question practice to those.
Practising as many exam-style questions as possible will be the key to passing this
exam. You must do questions under timed conditions and ensure you write full
answers to the discussion parts as well as doing the calculations.
Planning your revision
When you begin your course, you should make a plan of how you will manage your
studies, taking into account the volume of work that you need to do and your other
commitments, both work and domestic.
In this time, you should go through your notes to ensure that you are happy with all
areas of the syllabus and practise as many questions as you can. You can do this in
different ways, for example:
 Revise the subject matter a module at a time and then attempt the questions
relating to that module; or
 Revise all the modules and then build an exam out of the questions in this
Practice & Revision Kit. Review the exam structure and then group together the
relevant number of MCQs and longer questions from different syllabus areas to
create a practice exam.
Using the practice questions
The best approach is to select a question and then allocate to it the time that you
would have in the real exam. All the practice written response questions in this
Practice & Revision Kit have mark allocations, so you can calculate the amount of time
that you should spend on the question.
However, this is an approximate guide: for example, some MCQs are very short and
just require a factual response, which you either know or you don’t, while others are
more complex, requiring calculations, which will inevitably take more time.
vii
Exam techniques
Using the suggested solutions
Avoid looking at the answer until you have finished a question. It can be very
tempting to do so, but unless you give the question a proper attempt under exam
conditions you will not know how you would have coped with it in the real exam
scenario.
When you do look at the answer, compare it with your own and give some thought to
why your answer was different, if it was.
In multiple choice questions if you did not reach the correct answer make sure that
you work through the explanation or workings provided, to see where you went
wrong. If you think that you do not understand the principle involved, go back to your
own notes or your study materials and work through and revise the point again, to
ensure that you will understand it if it occurs in the exam.
Passing the [Business Level [I or II] – Business Environment and Economics
If you have honestly done your revision then you can pass this exam. What you must
do is remain calm and tackle it in a professional manner. There are a number of
points which you should bear in mind.
 You must read the question properly. Students often fail to read the question
properly and miss some of the information. Time spent reading the question a
second time would be time well spent. Make yourself do this, don't just rush into
it in a panic.
 Stick to the timings and answer all questions. Do not spend too long on one
question at the expense of others. The number of extra marks you will gain on
that question will be minimal, and you could have at least obtained the easy
marks on the next question.
viii
Format of the exam
Mode: Computer based examination

Time: 2 hours
Pass Mark: 50%
The exam comprises of fifty (50) multiple choice, drag & drop, fill in the blanks,
matching questions, etc. of two marks each (including mini scenario based/functional
scenario-based questions).
ix
Exam techniques
Exam techniques
Using the right techniques in the real exam can make all the difference between
success and failure.
Here are a few pointers:
1. At the start of the exam, skim through the questions and decide in what order
you are going to attempt the exam. You have to write your answers in the
order set out in the exam, but you can attempt the questions in any order that
you like. Some candidates like to attempt the easiest questions first, on the basis
that will enable them to gain the easiest available marks quickly and build up
their confidence.
2. Having established the order that you are going to do the exam, allocate the
time available to the questions and work out at what time you will need to
stop working on one question or batch of questions and move on to the next.
When you reach the end of the allocated time for the question that you are
working on, STOP. It is much easier to gain the straightforward marks for the
next question than to spend a long time working on the previous question in the
hope of gaining one or two final marks.
3. Make sure that you attempt every objective test question. Do not leave any
blank. If you run out of time or are not sure of an answer you should select the
option you think is most suitable. You can come back to the question later if
time permits.
4. Read the question. Read it carefully once, and then read it again to ensure that
you have picked everything up. Make sure that you understand what the
question wants you to do, rather than what you might like the question to be
asking you.
5. If you finish the exam with time to spare, use the rest of the time to review your
answers and to make sure that you answered every objective test question.
x
Action verbs checklist
Knowledge Process Verb List Verb Definitions

Tier – 1 Remember Define Describe exactly the nature, scope or meaning
Recall important Draw Produce (a picture or diagram)
information
Identify Recognise, establish or select after
consideration
List Write the connected items one below the other
Relate To establish logical or causal connections
State Express something definitely or clearly
Tier – 2 Comprehension Calculate/Compute Make a mathematical computation

Explain important Discuss Examine in detail by argument showing
information different aspects, for the purpose of arriving at
a conclusion
Explain Make a clear description in detail revealing
relevant facts
Interpret Present in understandable terms or to translate
Recognise To show validity or otherwise, using knowledge

or contextual experience
Record Enter relevant entries in detail
Summarise Give a brief statement of the main points (in

facts or figures)
xi
Tier – 3 Application Apply Put to practical use
Use knowledge in a setting Assess Determine the value, nature, ability or quality
other than the one in which
it was learned/solve close- Demonstrate Prove, especially with examples
ended problems Graph Represent by means of a graph
Prepare Make ready for a particular purpose
Prioritise Arrange or do in order of importance
Reconcile Make consistent with another
Solve To find a solution through calculations and/or

explanations
Tier – 4 Analysis Analyse Examine in detail in order to determine the
Draw relations among ideas solution or outcome
and to compare and Compare Examine for the purpose of discovering
contrast/solve open-ended similarities
problems
Contrast Examine in order to show unlikeness or
differences
Differentiate Constitute a difference that distinguishes
something
Outline Make a summary of significant features
xii
Tier – 5 Evaluate Advise Offer suggestions about the best course of
Formation of judgments and action in a manner suited to the recipient
decisions about the value of Convince To persuade others to believe something using
methods, ideas, people or evidence and/or argument
products
Criticise Form and express a judgment
Evaluate To determine the significance by careful

appraisal
Recommend A suggestion or proposal as to the best course
of action
Resolve Settle or find a solution to a problem or
contentious matter
Validate Check or prove the accuracy
Tier – 6 Synthesis Compile Produce by assembling information collected

Solve unfamiliar problems from various sources
by combining different Design Devise the form or structure according to a plan
aspects to form a unique or
Develop To disclose, discover, perfect or unfold a plan or
novel solution
idea
Propose To form or declare a plan or intention for
consideration or adoption
xiii
xiv
BL4 | Business Environment and Economics
2 CA Sri Lanka
Questions
PART A QUESTIONS: BUSINESS AND ORGANISATIONAL ENVIRONMENT

Questions 1 covers Business and organisational environment, the subject of
Chapters 1, 2 and 3 of the Study Text.
1 Introduction to organisational environment

1.1 'An organisation is a social arrangement which pursues collective
, which controls its own performance and which has a
boundary separating it from its environment.'
Which of the following words best completes this sentence?
A Profits
B Stakeholders
C Goals
D Tactics
(LO 1.1.1) (2 marks)
1.2 An organisation is owned and run by central government agencies. The

organisation is best described as which of the following?
A A voluntary sector organisation
B A private sector organisation
C A public sector organisation
D A partnership
(LO 1.1.1) (2 marks)
1.3 Which of the following organisations would rely most heavily on value for
money indicators and efficiency rather than information on performance
and profitability?
A A private accountancy college
B A local authority
C A small retailer
D A multi-national enterprise
(LO 1.1.2) (2 marks)
CA Sri Lanka 3
1.4 Which of the following best completes the following statement:

'Financial considerations are a constraint in not-for-profit organisations
because _____ '?
A They have no profits to reinvest
B They meet the needs of people who cannot afford to pay very much
C They don't have much money
D Their principal objectives are not financial, but they still need financial
resources in order to achieve them.
(LO 1.1.2) (2 marks)
1.5 Which of the following are features of not-for-profit organisations?

(i) Resources are used in a way which keeps costs as low as possible while
delivering the required level of quality.
(ii) Their primary aim is to maximise the wealth they generate for their
shareholders.
(iii) They aim to generate the maximum output possible from the resources
they use.
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
(LO 1.1.1) (2 marks)
The following information relates to Questions 1.6–1.8.

Kim has recently joined the accounts department of PPW, a public relations and
marketing business. Historically, PPW has operated as a single division, but the CEO
has now decided that its clients should be separated into two divisions: one dealing
with profit-seeking organisations, the other with not-for-profit organisations.
1.6 Kim has been given press cuttings about three of PPW's clients and asked to
add them to the client's files. However, she isn't sure which division they are
in.
From the headlines below, identify whether the clients are profit-seeking or
not-for-profit organisations:
Client 1 – 'Shareholders vote against directors' 
remuneration at AGM'
Client 2 – 'Dividends increased despite slight fall in sales' 
Client 3 – 'Hospital forced to cut staff in face of government 
funding cuts'
4 CA Sri Lanka
Questions
Drop down list:

Not-for-profit
Profit-seeking
Required
For each question, select the correct answer from the options in the drop
down list.
(LO 1.1.1) (2 marks)
1.7 After talking to her boss, Kim has become quite confused because, as well as
talking about profit-seeking and not-for-profit organisations, her boss was
talking about organisations being public sector, private sector or mutually
owned. Kim has asked you to help her categorise some different
organisations.
Identify whether the following are best described as public sector, private
sector or mutually owned organisations.
A company whose shares are bought and sold on a stock 

market
A police force 
A football club controlled by its supporters 
Drop down list:

Mutually owned
Private sector
Public sector
Required
down list.
(LO 1.1.1) (2 marks)
CA Sri Lanka 5
1.8 Kim has admitted to you she is finding it difficult to know how to distinguish
between different types of organisation. She has been looking at aims and
objectives of some of PPW's clients, but cannot identify whether they are
profit-seeking or not-for-profit organisations.
Identify whether each of the following aims or objectives are characteristic
of profit-seeking or not-for-profit organisations.
Organisation 1 – Prevent crime and protect local 

communities, and bring to justice those people who
commit offences
Organisation 2 – Maintain recent growth rates in order to 
increase market share
Organisation 3 – Achieve favourable pay, benefits and safe 
working conditions for members
Drop down list:

Profit-seeking
Not-for-profit
Required
down list.
(LO 1.1.1) (2 marks)
1.9 Which TWO of the following are NOT general characteristics of an

organisation?
A Organisational goals that are aligned with the individual goals of the
managers.
B Variance analysis
C Division of responsibilities between employees
D Sharing of knowledge
E People working together towards a common objective
(LO 1.1.2) (2 marks)
6 CA Sri Lanka
Questions
1.10 Which of the following groups may be considered to be stakeholders in the

activities of a nuclear power station?
(i) The government
(ii) Environmental pressure groups
(iii) Employees
(iv) Local residents
A (i), (iii) and (iv)
B (i), (ii), (iii) and (iv)
C (iii) only
D (i) and (iii)
(LO 1.2.1) (2 marks)
1.11 Two of Sunshine Co's stakeholder groups are putting the company under
pressure to improve its return on investment.
Which TWO of the following groups is this most likely to be?
A Shareholders
B Customers
C Bankers
D Suppliers
E Employees
(LO 1.2.2) (2 marks)
1.12 Perway Co is a large, manufacturing company. Identify whether each of the

following stakeholder groups are internal, connected or external
stakeholders for Perway.
Stakeholder group Type of stakeholder
Perway's customers 
Perway's staff 
Trade unions representing Perway's staff 
Perway's bank 
Environmental pressure groups complaining about 
pollution from Perway's factories
Perway's suppliers 
Drop down list:
Internal
Connected
External
CA Sri Lanka 7
Required
down list.
(LO 1.2.1) (2 marks)
1.13 The influence an organisation will normally have over its macro
environment will be:
A Limited or non-existent
B High
C Extremely high
D Intermittent
(LO 3.2.1) (2 marks)
1.14 Which of the following statements are true?

(i) Business ethics and corporate responsibility is the same thing
(ii) A business with the sole objective of profit maximisation will be not be
as ethical as a company working towards meeting wider objectives
A (i) only
B (i) and (ii)
C (ii) only
D Neither (i) nor (ii)
(LO 1.1.6) (2 marks)
1.15 The systems approach defines the organisation as a type of system. Social
organisations, such as businesses are, by definition .
Which word from the list below correctly fills in the blank?
A Open systems
B Closed systems
C Semi-closed systems
D Impossible to define
(LO 1.1.2) (2 marks)
1.16 Which of the following is not part of the task environment?

A Customers
B Suppliers
C Employees
D Potential employees
(LO 1.1.4) (2 marks)
8 CA Sri Lanka
Questions
1.17 Which of the following is not one of the five forces identified in Porter's
model?
A Substitute products or services
B New entrants to the industry
C Bargaining power of customers
D Government regulation of the industry
(LO 1.1.8, 8.1.1) (2 marks)
1.18 In Porter's Five Forces model, would the following constitute a 'barrier to
entry'?
Scale economies available to existing competitors 
Low capital investment requirements 
Low switching costs in the market 
Loyalty to existing brands 
Drop down list:
Yes
No
Required
down list.
(LO 1.1.8, 8.1.1) (2 marks)
1.19 Em Co, a firm of chartered accountants, is currently undertaking an

assurance engagement for CY Ltd, an insurance company. It has been
brought to the attention of the senior audit partner that a manager in the
audit team was previously employed by CY Ltd in their finance function in a
position where he was able to exert direct and significant influence over the
subject matter of the current assurance engagement.
This situation primarily gives rise to which of the following threats to the
manager's fundamental ethical principles?
A The self-interest threat
B The self-review threat
C The advocacy threat
D The intimidation threat
(LO 1.1.6) (2 marks)
CA Sri Lanka 9
1.20 Which TWO of the following can be used when defining ethics?
A Set of moral principles
B Set of shared moral principles
C Guide our behaviour
D Details specifically how we should behave in a given scenario
E Set of rules to encourage honesty and integrity
(LO 1.1.6) (2 marks)
1.21 Which one of the following is NOT an example of corporate social

responsibility by a company?
A Using 'green' sources of energy such as solar power
B Ensuring that all operational centres comply with legal health and
safety standards
C Providing subsidised private health insurance for employees and their
immediate families
D Refusing to sell products to a foreign government with a record of
human rights abuses and that has been condemned by the
international community
(LO 1.1.6) (2 marks)
1.22 Which TWO of the following factors indicate that suppliers have high
bargaining power in an industry?
A There are a large number of suppliers
B There is a lack of substitute products available
C Switching costs for customers are low
D The product supplied is highly differentiated
E Product quality is not important to customers
(LO 1.3.1) (2 marks)
1.23 Collaborating with its suppliers may bring a company added value because it
can:
A Strike a harder bargain with its suppliers
B Work with a supplier to improve quality and reduce costs
C Avoid transaction costs
D Introduce price competition amongst suppliers
(LO 1.3.1) (2 marks)
10 CA Sri Lanka
Questions
1.24 Which of the following socio-cultural trends will have a direct impact on
most business organisations?
(i) Increasing ethnic and religious diversity in populations
(ii) Falling birth-rates
(iii) Focus on green issues
(iv) Increase in single-member households
A (iii) only
B (i) and (ii) only
C (i), (ii) and (iii) only
D (i), (ii), (iii) and (iv)
(LO 1.1.5) (2 marks)
CA Sri Lanka 11
PART B QUESTIONS: NATURE AND SCOPE OF BUSINESS MANAGEMENT

Question 2 covers the Nature and scope of business management, the subject of
Chapter 4 of the Study Text.
2 Businesses management
2.1 Of Mintzberg's nine managerial roles, which is being exercised by a manager
who gathers information from contacts within and outside the organisation?
A Leader
B Monitor
C Spokesperson
D Disseminator
(LO 2.2.3) (2 marks)
2.2 According to Drucker, which one of the following is a management task?

A Informational
B Developing people
C Decisional
D Experimenting
(LO 2.2.4) (2 marks)
2.3 Which of the following is not an element of the management process?

A Planning
B Leading
C Reviewing
D Controlling
(LO 2.1.4) (2 marks)
2.4 The approach to effectiveness measures effectiveness by

comparing actual business performance with its stated objectives.
A Goal
B Internal processes
C Systems resource
D Variance
(LO 2.1.3) (2 marks)
12 CA Sri Lanka
Questions
2.5 Identify whether the following descriptions are associated with economy,
efficiency or effectiveness.
Reduction, or containment of cost 

The ability to realise missions and goals 
Production of the maximum output with a given set of 
resource inputs
Drop down list:
Economy
Efficiency
Effectiveness
Required
down list.
(LO 2.1.3) (2 marks)
2.6 Which of the following is NOT one of the leadership skills proposed by Katz?
A Technical
B Human
C Conceptual
D Practical
(LO 2.2.3) (2 marks)
2.7 Wastby plc has noticed a recent downturn in productivity in one of its key
production departments. It has been established that a particular group of
production workers are demotivated at the moment as a result of the actions
of a previous manager who has recently been replaced. The new manager
has been asked to find ways to improve the motivation of the group during
the next three months. In terms of the management process, the manager is
being asked to:
A Plan
B Organise
C Control
D Lead
(LO 2.1.4) (2 marks)
CA Sri Lanka 13
2.8 Performance measures can be approached in three different ways: economy,

efficiency, and effectiveness. Effectiveness is measured by:
A The amount of resources used for the tasks that have been achieved
B The success in achieving goals and targets
C Team member satisfaction and the motivational climate
D The success of the team or work group in controlling its costs
(LO 2.1.3) (2 marks)
2.9 Who argued that management should be based on 'well-recognised, clearly

defined and fixed principles, instead of depending on more or less hazy
ideas'?
A Fayol
B Mintzberg
C Taylor
D Fiedler
E Adair
(LO 2.2.3) (2 marks)
2.10 Which of the following is the objective of efficient and effective business
processes?
A Creating the maximum output
B Creating value for money products
C Creating the maximum output for minimum input
D Creating the best quality output from the available inputs
(LO 2.1.3) (2 marks)
14 CA Sri Lanka
Questions
PART C QUESTIONS: FUNCTIONS OF MANAGEMENT

Question 3 to 5 cover Functions of management, the subject of Chapters 5, 6 and 7
of the Study Text.
3 Planning and control

3.1 Which of the following terms is used to describe the 'right' to perform an
action in an organisation?
A Responsibility
B Authority
C Influence
D Power
(LO 3.2.5) (2 marks)
3.2 Which of the following terms is NOT true of budgets?

A Budgets are useful as a mechanism of control
B A budget is a long-term plan for an organisation's resources
C Budgets aid co-ordination and communication
D Budgets should support the achievement of the long-term objectives of
the organisation
(LO 3.1.8) (2 marks)
3.3 Which of the following terms is NOT an advantage of planning?

A Guides the allocation of resources
B Ensures a commitment to short-term goals
C Co-ordinates activities across the organisation
D Provides a standard against which actual performance can be
measured and controlled
(LO 3.1.4) (2 marks)
3.4 Which of the following is assessed using the criteria suitability, acceptability,
and feasibility?
A Strategies
B Goals
C Performance
D Teams
(LO 3.1.6) (2 marks)
CA Sri Lanka 15
3.5 Effective objectives should be SMART. What quality of objectives does the 'S'
in SMART represent?
A Standardised
B Short-term
C Specific
D Scheduled
(LO 3.1.6) (2 marks)
3.6 Making optimum use of the required resources refers to which task of
management?
A Planning
B Organising
C Leading
D Controlling
(LO 2.1.4) (2 marks)
4 Organising
4.1 A manager has a high level of supervisory activity in her workload. What
impact will this have on the amount of authority she delegates to her
subordinates?
A Increase the amount of delegation
B Reduce the amount of delegation
C Have no impact on the amount of delegation
D Enable upwards delegation
(LO 3.2.6) (2 marks)
4.2 Y plc is a growing organisation which has recently diversified into a number
of significant new product markets. It has also recently acquired another
company in one of its overseas markets.
What would be the most appropriate form of organisation for Y plc?
A Geographical departmentation
B Divisionalisation
C Functional departmentation
D Customer departmentation
(LO 3.2.2) (2 marks)
16 CA Sri Lanka
Questions
4.3 Which of the following principles of classical management is challenged by

matrix management?
A Structuring the organisation on functional lines
B Structuring the organisation on geographical lines
C Unity of command
D Decentralisation of decision-making
(LO 3.2.3) (2 marks)
4.4 What is an organisation which has removed the internal barriers which
separate hierarchy levels and functions and also between the organisation
and its suppliers, customers and competitors known as?
A Modular organisation
B Hollow organisation
C Jobless structure
D Boundaryless organisation
(LO 3.2.2) (2 marks)
4.5 Which of the following is a correct definition of the term 'span of control'?
A The number of employees reporting to one manager
B The number of managers to whom one employee reports
C The number of levels in the hierarchy
D The number of employees at each level of the organisation
(LO 3.2.4) (2 marks)
4.6 Identify whether the following are associated with organic or mechanistic
organisations.
A clear hierarchical structure is in place 
Flatter organisational structures 
A culture that embraces change 
Drop down list:

Organic
Mechanistic
Required
down list.
(LO 3.2.4) (2 marks)
CA Sri Lanka 17
4.7 A recent trend in organisation and management is the rise in the 'virtual
organisation' and 'virtual teamworking'. Which of the following
environmental (PEST) factors is this most directly attributed?
A Political
B Economic
C Socio-cultural
D Technological
(LO 1.1.5, 3.2.2) (2 marks)
4.8 Henry Mintzberg categorised five basic components of an organisation.

Which TWO the following statements describes the work of the
technostructure of an organisation?
(i) Designing systems
(ii) Organising and controlling work
(iii) Standardising work
(iv) Securing inputs
A (i) and (ii)
B (i) and (iii)
C (ii) and (iii)
D (iii) and (iv)
(LO 3.2.3) (2 marks)
4.9 In terms of its organisational structure, Daventry plc is a flat business. This
characteristic gives which advantage to the managers of the company?
A Participative decision-making
B Facilitation of management training
C Greater opportunity to delegate
D Narrow spans of control
(LO 3.2.3) (2 marks)
18 CA Sri Lanka
Questions
4.10 Which of the following are components of an organisation according to

Mintzberg?
A Tactical line 
B Technostructure 
C Support staff 
D Operational management 
E Strategic apex 
Dropdown list:
Yes
No
Required
down list.
(LO 3.2.3) (2 marks)
4.11 The following diagram is of Henry Mintzberg's organisational configuration

framework.
Complete the diagram by placing FOUR terms from the list below into the
correct position.
Techno
Structure
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A Adhocracy
Matrix
B
Middle line
C
Operating Core
D
Strategic Apex
E
Support Staff
F
(LO 3.2.3) (2 marks)
4.12 Which of the following organisational structures encourages employee

flexibility and multiple reporting?
A Matrix
B Centralised
C Functional
D Divisional
(LO 3.2.2) (2 marks)
4.13 Mintzberg's design of an effective organisation does NOT include which of

the following categories?
A Technostructure
B Outsource partners
C Operating core
D Strategic apex
(LO 3.2.3) (2 marks)
4.14 Which of the following is NOT an advantage that virtual companies have?
A Materials can be acquired more cheaply
B It can respond to the environment quickly
C It has a low cost base
D It has a single supply chain
(LO 3.2.2) (2 marks)
20 CA Sri Lanka
Questions
4.15 Dispersed and virtual teams are normally a result of:

A An economic downturn
B Developments in technology and information systems
C Poor staff morale and motivation within the workforce
D Ineffective human resourcing practices
(LO 3.2.2) (2 marks)
4.16 Choose from the following words to complete the sentence.

 responsibility
 power
 accountability
 authority
Delegation is the process whereby a manager assigns part of his
to a subordinate but the manager's can
never be delegated.
(LO 3.2.5, 3.2.6) (2 marks)
5 Leadership, motivation and communication

5.1 Leaders may be distinguished from managers by the fact that they do not
depend on in the organisation.
Which of the following types of power correctly completes this statement?
A Expert power
B Position power
C Physical power
D Psychological power
(LO 3.3.3) (2 marks)
5.2 Which of the following models of human behaviour emphasise the

importance of remuneration as a key need and, therefore, motivator of
people?
A Theory X 
B Scientific management 
C The hygiene factor 
D Theory Y 
E The managerial grid 
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Drop down list:

Yes
No
Required
down list.
(LO 3.3.7) (2 marks)
5.3 Gossiping in the staff kitchen is which form of communication?

A Informal
B Unofficial
C Formal
D Non-verbal
(LO 3.3.7) (2 marks)
5.4 What type of communication is speaking to a customer at a social function?

A Internal formal
B External formal
C Internal informal
D External informal
(LO 3.3.7) (2 marks)
5.5 In an internal communication which of the following is likely to be part of

information that would take an upward trend?
A Reports
B Policies
C Instructions
D Decisions
(LO 3.3.7) (2 marks)
5.6 In an internal communication of a given organisation, the following can

constitute downward flow of information except:
A Instructions
B Complaints
C Decisions
D Reprimands
(LO 3.3.7) (2 marks)
22 CA Sri Lanka
Questions
5.7 Which of the following can be carried along in external communication?

A Internal adverts
B The day-to-day activities of the company
C The corporate image of the organisation
D Nature of channel–vertical, horizontal or diagonal are used frequently
(LO 3.3.7) (2 marks)
5.8 Which of the following is not a potential barrier to communication?

A Emotion
B Language
C Status
D Feedback
(LO 3.3.13) (2 marks)
5.9 Which of the following would be the most appropriate communication

method for a large amount of complex, technical information?
A Graphics
B Oral
C A report
D A memorandum
(LO 3.3.14) (2 marks)
5.10 A company has to inform its employees of major changes to the details of the
company pension scheme. The changes will leave employees worse off.
Which of the following is likely to be the most successful communications
strategy?
A An email that allows employees to respond with questions
B A speech by the finance director
C Graphics
D Meetings with employees together with written details of the changes.
(LO 3.3.14) (2 marks)
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5.11 Poshya is in charge of her local tennis club, and she focuses a lot of her
attention on social events for the members. Whilst the rest of the club enjoy
this opportunity to get together and catch up on the gossip, some feel there
is a lack of focus on some of the issues concerning the tennis courts and bad
debts linked to membership fees. What rating would Poshya most likely have
in Blake and Mouton's managerial grid?
A 9:1
B 9:9
C 1:1
D 1:9
(LO 3.3.2) (2 marks)
5.12 Which of the following is NOT part of Maslow's hierarchy of needs?

A Safety
B Esteem
C Self autonomy
D Social
(LO 3.3.7) (2 marks)
5.13 Identify whether the following statements are true or false

A reward is the offer or promise of a benefit for 
contribution or success, designed to motivate the
individual or team.
In Vroom's expectancy theory, the lower the values of 
valence and expectancy, the higher the motivation.
According to Herzberg, supervision is a motivating factor 
Drop down list:

True
False
Required
down list.
(LO 3.3.7) (2 marks)
24 CA Sri Lanka
Questions
5.14 Determine which theory of leadership supports the view that leadership
skills can be taught.
A Traits theory
B Behavioural theory
C Contingency theory
D Empowerment theory
(LO 3.3.7) (2 marks)
5.15 Examine the four scenarios below and determine in which one Maduka is
displaying transformational leadership.
A The manager of the call centre has complained to Maduka about low
morale. Maduka tells the call centre manager that 'Morale is not her
problem; he is in charge of staff'.
B The call centre has had its worst sales month in 18 months. Maduka
decides to run the figures again herself, and to personally read through
the call centre scripts to ensure they are correct.
C The call centre is performing under its targets. Maduka sits with the
three worst individual performers to ensure they are following their
scripts exactly. She offers them incentives to improve their
performance.
D The call centre has received increasing complaints from customers
about rude service. One morning, Maduka visits the call centre, makes
some customer calls, and informally chats to staff. She decides a wide-
ranging review of 'how things are done' is required to look for
improvement and implement change.
(LO 3.3.7) (2 marks)
5.16 Abraham Maslow's theory of motivation is often represented as:

A A hierarchy of needs
B Individual behaviour labelled X or Y
C A scientific relationship between work and reward
D A series of negative and a series of positive factors
(LO 3.3.7) (2 marks)
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5.17 Which of the equations below represents Victor Vroom's model of

motivation (Force may sometimes be replaced by Motivation in this
equation)?
A Force × Valence = Expectation
B Force × Expectation = Subjective probability
C Subjective probability × Expectation = Force
D Force = Valence × Expectation
(LO 3.3.7) (2 marks)
5.18 A Finance Director has worked for HSWW for over 20 years and during that
period many of her colleagues have commented that she is the best manager
they have had and want to imitate her.
Which of the following best indicates the power source this gives the Finance
Director?
A Coercive
B Referent
C Reward
D Expert
(LO 3.3.7) (2 marks)
5.19 Which THREE of the following represent barriers to communication?

A The choice of words provokes an emotional response
B Ensuring all elements of the communication 'fit'
C The filtering out of elements that he or she does not want to deal with
D Limiting the encoding/decoding capabilities of the sender/receiver
E Physically nodding confirmation
(LO 3.3.13) (2 marks)
5.20 Content theories of motivation tend to focus mainly on:

A The needs of the group
B Feelings of complacency or dissatisfaction
C The needs of individuals
D The use of 'carrots' and 'sticks' as devices
(LO 3.3.7) (2 marks)
26 CA Sri Lanka
Questions
PART D QUESTIONS: FUNCTIONAL AREAS OF BUSINESS

Questions 6 to 9 cover Functional areas of business, the subject of Chapters 8, 9,
10 and 11 of the Study Text.
6 Operation management
6.1 Which of the following describes how introducing information technology
can enhance business processes?
A Increasing the length of existing processes
B Redirecting existing information flows
C Replacing inefficient parallel processes with efficient sequential
processes
D Reducing delays in the decision making of management
(LO 4.1.6) (2 marks)
6.2 Select the correct term to match each of the relevant parts of the process for
an accounting firm:
Process part Term
The trained accountant 
The client's transactional data 
The financial statements 
The audit 
Drop down list:
Transforming inputs
Transformed inputs
Outputs
Transformation process
Required
down list.
(LO 4.1.1) (2 marks)
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6.3 Which of the following is NOT one of the four Vs used to analyse the
differences between transformational processes?
A Volume
B Variety
C Velocity
D Visibility
(LO 4.1.1) (2 marks)
6.4 Use the words from the list below to complete the following statement:
 create
 fulfill
 market requirements
 resources
In operations management are used to outputs that
specific
(LO 4.1.1) (2 marks)
6.5 Optimised production technologies (OPT) is an operations management

system which aims to:
A Improve distribution networks
B Improve supply sourcing alternatives
C Integrate operations and quality assurance
D Reduce production bottlenecks
(LO 4.1.6) (2 marks)
6.6 Which of the following is NOT true of lean manufacturing?

A Aims to improve efficiency
B Aims to eliminate waste in the system
C Removes non-value adding activities
D Based on long-term forecasts of demand
(LO 4.1.3) (2 marks)
28 CA Sri Lanka
Questions
7 Marketing management
7.1 Which one of the following statements best represents 'a marketing
orientation'?
A Support for the marketing department from top management
B A large marketing budget
C High profile advertising campaigns
D A focus on customer needs
(LO 4.2.3) (2 marks)
7.2 Which of the following can be considered to be customers of a charity?

(i) Beneficiaries
(ii) Trustees
(iii) Regulators
(iv) The government
A (i), (ii) and (iii)
B (i) and (iii)
C (ii) and (iii)
D All of the above
(LO 4.2.3) (2 marks)
7.3 Craven plc sells one product. It is a highly specialised chemical used
exclusively in the printing ink industry, which is dominated by a small
number of large multinational firms. Although only small quantities of the
chemical are sold each year the product's unique characteristics mean it is
highly profitable for the company. It should be expected, therefore, that the
promotional and distribution strategies employed by Craven plc will be:
A Sales promotion and direct distribution
B Personal selling and indirect distribution
C Sales promotion and indirect distribution
D Personal selling and direct distribution
(LO 4.2.4) (2 marks)
7.4 What are the 4Ps of the marketing mix for the provision of goods?
A Purchase, price, product and promotion
B Price, place, product and promotion
C Promotion, people, physical evidence and place
D Physical evidence, place, product and promotion
(LO 4.2.4) (2 marks)
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7.5 Why do marketers often segment a market?

A To allow marketing staff to allocate their workload fairly
B Because most markets are too large to sell to everyone
C Because it is well-established best practice
D Because customers that share certain characteristics are likely to
exhibit similar buying behaviour
(LO 4.2.4) (2 marks)
7.6 Which of the following is a type of marketing is focused on the short term
and on particular elements of the marketing mix?
A Mass marketing
B Target marketing
C Strategic marketing
D Tactical marketing
(LO 4.2.4) (2 marks)
7.7 Organisations that focus primarily on product features are said to be:
A Sales oriented
B Product orientated
C Market orientated
D Production orientated
(LO 4.2.3) (2 marks)
7.8 Undifferentiated market positioning involves the targeting of:

A A single market segment with a single marketing mix
B A single market segment ignoring the concept of the marketing mix
C An entire market with a different marketing mix for each segment
D An entire market with a single marketing mix
(LO 4.2.4) (2 marks)
7.9 An organisational approach that involves targeting an entire market with a

single marketing mix is known as which of the following?
A Undifferentiated
B Differentiated
C Saturated
D Blanket
(LO 4.2.4) (2 marks)
30 CA Sri Lanka
Questions
7.10 In terms of market positioning, concentrated positioning means to:

A Target a single market segment with a specific product
B Target the whole market with a single product
C Target each market segment with a distinct marketing mix
D Target a single market with a range of products
(LO 4.2.4) (2 marks)
7.11 A company that concentrates on product features it instinctively believes to

be 'right' is referred to as:
A A learning organisation
B Production orientated
C Product orientated
D Early stage entrepreneurial
(LO 4.2.3) (2 marks)
7.12 Which of the following describes an aspect of marketing rather than selling?
A It is concerned with meeting customers' needs for value in the delivery
process
B Customer design is of low importance
C It is concerned with the satisfaction of customer needs over the long
term
D The stimulation of demand is of low importance
(LO 4.2.1) (2 marks)
7.13 Which of the following is NOT a base for demographic segmentation?

A Family lifecycle stage
B Gender
C Age
D Hobbies and interests
(LO 4.2.4) (2 marks)
7.14 Which of the following statements best represents 'a product orientation'?
A Focus is on actively and aggressively selling as many products as
possible
B Focus is on producing goods/services of optimum quality and cost
C Focus is on product development
D Focus is on offering as many products as possible to meet a variety of
customer needs
(LO 4.2.3) (2 marks)
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7.15 For organisations failing to adopt the marketing philosophy, which of the
following is NOT recognised as an alternative?
A Sales orientation
B Product orientation
C Lean orientation
D Production orientation
(LO 4.2.3) (2 marks)
7.16 Distribution channels, transport, warehouse and sales outlet locations are all
examples of:
A 'Place', one component of the marketing mix
B 'Promotion', one component of the marketing mix
C 'Physical evidence', one component of the marketing mix
D The management of operations for a service organisation
(LO 4.2.4) (2 marks)
7.17 Effective product promotion is centred on:

A Production processes
B Customers and communication
C Bonuses for sales staff and product quality
D Effective systems of monitoring and control
(LO 4.2.4) (2 marks)
7.18 Which of the following would raise ethical issues for a manufacturer of fast-
moving consumer goods?
(i) The materials used in manufacture of the goods
(ii) The quality of the goods
(iii) How the goods are advertised
(iv) How much its raw materials suppliers pay their staff
(v) How the goods are packaged
A (ii) and (iii)
B (i), (ii) and (iii)
C (ii), (iii) and (v)
D All of the above
(LO 4.2.1, 1.1.6) (2 marks)
32 CA Sri Lanka
Questions
7.19 Which of the following shows the correct stages and sequence of the product
life cycle?
A Product, price, promotion, place
B Introduction, growth, maturity, decline
C Introduction, growth, middle-age, maturity, decline
D Product, price, promotion, place, people
(LO 4.2.4) (2 marks)
7.20 Direct mailing, branding activities and public relations campaigns are all
examples of:
A Market process
B Product placement
C Promotion
D Market research
(LO 4.2.4) (2 marks)
7.21 The extended marketing mix does NOT include which of the following?
A People
B Processes
C Physical evidence
D Positioning
(LO 4.2.4) (2 marks)
7.22 Social media may be a particularly good medium for marketing for a
particular type of organisation.
Which of the following may find it particularly beneficial?
A A multinational
B A company based in another country
C A small business
D A limited liability partnership
(LO 4.2.5) (2 marks)
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8 Human resource management

8.1 A recruitment manager has prepared a statement of the key duties, tasks and
reporting responsibilities involved in a particular job, as the basis for job
interviewing.
What name would be given to such a statement?
A Job analysis
B Job description
C Job advertisement
D Personnel specification
(LO 4.3.2) (2 marks)
8.2 Which of the following is a disadvantage of a large panel or selection board

interview compared to individual or one-to-one interviews?
A A number of people see the candidate at one sitting
B Specialists can ask questions about technical areas of the work
C Questions tend to be more varied and more random
D There is less opportunity for personal rapport with the candidate
(LO 4.3.2) (2 marks)
8.3 The first stage in the recruitment process is:

A To write a job description
B To write a person specification
C To identify a vacancy
D To liaise with recruitment consultants
(LO 4.3.2) (2 marks)
8.4 Which of the following statements about training is most likely to be the
foundation of an effective training policy?
A Training is the responsibility of the HR department
B Training is all cost and no quantifiable benefit
C The important thing is to do lots of training
D Training can be an effective solution to some performance problems
(LO 4.3.2) (2 marks)
34 CA Sri Lanka
Questions
8.5 Which of the following are 'on the job' training methods?
(i) Day-release
(ii) Job rotation
(iii) Coaching
(iv) Temporary promotion
A (iii) only
B (i) and (iii)
C (ii), (iii) and (iv)
D All of the above
(LO 4.3.2) (2 marks)
8.6 Recruitment is:
A Creating as large a pool of prospective applicants as possible
B Hiring the most appropriate person for the job
C Obtaining a suitable pool of applicants
D Selecting the most suitable applicant from a pool of applicants
(LO 4.3.2) (2 marks)
8.7 Which of the following is NOT a valid outcome of a human resource
management strategy?
A Financial outcomes
B Behavioural outcomes
C Performance outcomes
D Process outcomes
(LO 4.3.2) (2 marks)
8.8 Which of the following is an example of human resource management rather
than personnel management?
A Priority is given to the needs of the employees
B Employees are considered as a resource to be controlled
C Strong and regular communication to and from the workforce
D Priority is given to funding employee pension schemes
(LO 4.3.2) (2 marks)
8.9 Which of the following is associated with the recruitment process rather
than the selection process?
A Assessment centres
B Interviews
C Advertising copy
D Psychometric testing
(LO 4.3.2) (2 marks)
CA Sri Lanka 35
8.10 The set of activities designed to familiarise a new employee with an

organisation is called:
A Job analysis
B Induction
C Selection
D Manipulation and co-optation
(LO 4.3.2) (2 marks)
8.11 Recruitment involves:

A Advertising a vacancy and interviewing
B Conducting interviews and tests
C Advertising a vacancy and initial screening of candidates
D Ensuring that contract negotiation complies with organisational policy
(LO 4.3.2) (2 marks)
9 Information management systems and project

management
9.1 Many large organisations have established a computer intranet for the
purpose of:
A Providing quick, effective and improved communication amongst staff
using chat rooms
B Providing quick, effective and improved communication to staff
C Providing quick, effective and improved communication to customers
D Providing quick, effective and improved ordering procedures in real
time
(LO 4.4.1) (2 marks)
9.2 A system that aims to increase the productivity of data and information
workers is:
A An expert system
B An executive support system
C A decision support system
D An office automation system
(LO 4.4.2) (2 marks)
36 CA Sri Lanka
Questions
9.3 Which part of an information system is responsible for recording despatches

then automatically producing invoices and debiting the receivables ledger?
A Transaction processing system
B Management information system
C Office automation system
D Operating system
(LO 4.4.2) (2 marks)
9.4 Electronic executive information systems (EIS) and expert systems (ES) are
examples of:
A Customer relationship management software
B Database management systems
C Computer networking
D Decision-based software
(LO 4.4.2) (2 marks)
9.5 A system that simulates the problem solving techniques of human experts is
known as:
A An expert system
B A knowledge transfer programme
C A smart system
D A management information system
(LO 4.4.2) (2 marks)
9.6 Which of the following is a system that enables a business to manage its
relationships centrally through the storage of existing and potential
customer contact information, accounts and leads?
A Customer relationship management system
B Expert system
C E-commerce
D Cloud computing
(LO 4.4.2) (2 marks)
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9.7 Libby is the project manager for an IT project which has the objective of
improving the functionality of the company's website. This will involve
designing a system which enhances the customer experience of navigating
the website and simplifies the process for placing orders for the company's
products - which are stationery items (paper clips, rulers etc) shaped like
animals. The launch of the new website is time critical; customers need their
tortoise-shaped drawing pins.
The project must be completed in three months' time but is experiencing
significant slippage and is behind schedule. Which of the following things
should Libby do to get back on track?
A Maintain quality and reduce resources
B Increase resources and increase quality
C Reduce resources and increase quality
D Increase resources and maintain quality
(LO 4.4.4) (2 marks)
9.8 According to PRINCE2 methodology, which process ensures that all planned
deliverables are completed as required?
A Initiation
B Managing product delivery
C Managing stage boundaries
D Project assurance
(LO 4.4.5) (2 marks)
9.9 Projects present some management challenges.

Which of the following are potential challenges for project managers?
Select ALL that apply.
A Teambuilding
B Expected problems
C Unexpected problems
D Delayed benefit
E Potential for conflict
(LO 4.4.4) (2 marks)
38 CA Sri Lanka
Questions
9.10 Identify whether the following are features of projects or business as usual:
Defined beginning and end 
Many recurring tasks 
Full time use of resources 
Drop down list:
Projects
Business as usual
Required
down list.
(LO 4.4.4) (2 marks)
9.11 In the 7S model, which element is most closely linked to culture?

A Staff
B Structure
C Style
D Strategy
(LO 4.4.4) (2 marks)
9.12 Building a project team is an activity that falls within which of the following
elements of the 7S model?
A Staff
B Stakeholder
C Strategy
D Structure
(LO 4.4.4) (2 marks)
9.13 It is a fundamental aspect of PRINCE2 that a project is driven by

its ______________.
Select the correct word to fill in the blank
A Business case
B Deliverables
C Objectives
D Client specifications
(LO 4.4.5) (2 marks)
CA Sri Lanka 39
9.14 PRINCE2 planning is based on which of the following?

A Work breakdown structure
B Product breakdown structure
C Project breakdown structure
D Budget breakdown structure
(LO 4.4.5) (2 marks)
9.15 Planning in PRINCE2 consists of a hierarchy of plans. Rank the plans in

order of the hierarchy with 1 representing the highest level plan and 4
representing the lowest level plan:
Detailed plan 
Project plan 
Stage plan 
Individual work plan 
Drop down list:
1
2
3
4
Required
down list.
(LO 4.4.5) (2 marks)
9.16 In PRINCE2, day to day management of the project is carried out by which of
the following:
A The project board
B The project manager
C The project sponsor
D The PRINCE2 system itself
(LO 4.4.5) (2 marks)
40 CA Sri Lanka
Questions
9.17 Maylor has described a project in systems terms as a process of conversion,

consisting of four elements: inputs, constraints, mechanisms, outputs.
To which of the elements does project planning relate?
A Input
B Output
C Mechanism
D Constraint
(LO 4.4.4) (2 marks)
9.18 The success of a project is measured by which of the following?

A Its ability to meet time, cost and budget constraints
B The benefits received as a result
C Meeting the objectives of the project manager
D The level of funding it receives
(LO 4.4.4) (2 marks)
9.19 Maylor has described a project in systems terms as a process of conversion.

Which of the following would be considered to be a constraint in this
process?
A The project specification
B Technology
C Compliance with laws and regulations
D Money
(LO 4.4.4) (2 marks)
9.20 Which of the following is NOT one of the three constraints of a project
A Time
B Cost
C Quality
D Labour
(LO 4.4.4) (2 marks)
CA Sri Lanka 41
PART E QUESTIONS: ROLE OF ECONOMICS IN BUSINESS

Question 10 covers the Role of economics in business, the subject of Chapter 12 of
the Study Text.
10 Economics in businesses
10.1 Which of the following types of good is affected by the free rider problem?
A Merit goods
B Public goods
C Demerit goods
D Luxury goods
(LO 5.1.4) (2 marks)
10.2 Which of the following best describes a public good?

A A good or service which should be subsidised or provided free in order
to encourage its consumption
B A good or service which is non-diminishable and non-exclusive and
therefore will not be provided by the free market
C A benefit arising from the consumption of a good which is experienced
by people other than the immediate consumer of that good
D A cost arising from the production of a good which is borne by people
other than the immediate producer of that good
(LO 5.1.4) (2 marks)
10.3 Economic profits consist of which of the following?

A Sales revenue minus explicit costs
B Sales revenue minus explicit costs and opportunity costs
C Sales revenue minus explicit costs and implicit costs
D Sales revenue minus implicit costs and opportunity costs
(LO 5.1.4) (2 marks)
10.4 In terms of returns to factors of production, the return that is made to

entrepreneurship is which of the following?
A Wages
B Profit
C Interest
D Rent
(LO 5.1.4) (2 marks)
42 CA Sri Lanka
Questions
10.5 Which of the following is NOT a macroeconomic factor?

A The relationship between price and demand in a particular market
B Price inflation
C Levels of savings and investment
D Unemployment amongst young people
(LO 5.1.1) (2 marks)
10.6 ____________ economics is based on the ideal.

Select the correct word to complete the sentence
A Positive
B Idealistic
C Normative
D Emergent
(LO 5.1.3) (2 marks)
10.7 What is the central problem of an economy?

A Scarcity of resources
B Meeting demand with supply
C Unemployment
D Inflation
(LO 5.2.1) (2 marks)
10.8 Goods whose demand eventually falls as income rises are best described as
which of the following?
A Normal goods
B Inferior goods
C Luxury goods
D Public goods
(LO 5.1.4) (2 marks)
10.9 The ability of a society to produce all the various combinations of goods is
represented by which of the following?
A Production possibility frontier
B Total production curve
C Market equilibrium
D Production capacity curve
(LO 5.2.1) (2 marks)
CA Sri Lanka 43
PART F QUESTIONS: PRICE MECHANISM AND COMPETITIVE MARKETS

Questions 11 and 12 cover Price mechanism and competitive markets, the
subject of Chapter 13 of the Study Text.
11 Demand, supply and market equilibrium

11.1 Which one of the following would cause the supply curve for a good to shift
to the right (outwards from the origin)?
A A fall in the price of the good
B An increase in the demand for the good
C A fall in production costs of the good
D The imposition of a minimum price
(LO 6.1.4) (2 marks)
11.2 Which one of the following would NOT lead directly to a shift in the demand
curve for overseas holidays?
A An advertising campaign by holiday tour operators
B A fall in the disposable incomes of consumers
C A rise in the price of domestic holidays
D A rise in the price of overseas holidays
(LO 6.1.4) (2 marks)
11.3 Which of the following is likely to lead to a fall in the price of good Q which is
a normal good?
A A rise in the price of good P, a substitute for good Q
B A fall in the level of household incomes generally
C A fall in the price of good T, a complement to good Q
D A belief that the price of good Q is likely to double in the next 3 months
(LO 6.1.4) (2 marks)
11.4 The demand curve for a resource may shift because of:
A A change in the demand for a good whose production is dependent on
the resource
B Concerns about potential harmful pollution from the resource
C A change in the price of a substitute resource
D All of the above
(LO 6.1.2) (2 marks)
44 CA Sri Lanka
Questions
11.5 Consumer surplus is:

A The excess between what consumers are prepared to pay for a good or
service, and the prevailing market price
B The indirect tax producers pay on a good or service
C The marginal utility gained by consuming one more unit of a good or
service
D The indirect tax consumers pay on a good or service
(LO 6.1.4) (2 marks)
11.6 Which THREE of the following reasons would result in a shift of the demand
curve to the right for a normal good?
A A fall in the price of substitutes
B A change in taste towards a competitor good
C An increase in household incomes
D An expected future rise in the price of the good
E A rise in the price of complements
F An increase in population
(LO 6.1.4) (2 marks)
11.7 For a normal, but inferior good, the demand curve slopes to the
right.
A Downwards
B Upwards
C Horizontally
D Vertically
(LO 6.1.2) (2 marks)
11.8 Which of the following statements are true of free trade?

(i) Facilitates specialisation by country
(ii) Encourages exports
(iii) Encourages investment in resources
A (i) and (ii)
B (i) and (iii)
C (ii) and (iii)
(LO 6.1.1) (2 marks)
CA Sri Lanka 45
11.9 Consider the market for DVD discs. Due to new developments in production
technology, the cost of producing DVD discs has become substantially lower.
Which of the following will be most likely to happen as a result?
A The supply curve for DVD discs will shift to the right. The price of the
discs will fall and more discs will be supplied.
B The supply curve for DVD discs will shift to the right. The price of the
discs will fall and fewer discs will be supplied at this price.
C There will be a movement to the left along the supply curve and fewer
discs will be supplied at a lower price.
D The supply curve for DVD discs will shift to the left. The price of discs
will rise, but fewer discs will be supplied at this price.
(LO 6.1.3) (2 marks)
11.10 Which of the following will be expected to lead to a shift in the demand
curve for foreign holidays?
(i) An advertising campaign for foreign holidays
(ii) A fall in the disposable incomes of consumers
(iii) A rise in the price of domestic holidays
(iv) A rise in the price of foreign holidays
A (i) and (ii)
B (i) and (iii)
C (iii) and (iv)
(LO 6.1.2) (2 marks)
11.11 Which of the following will cause the demand curve for a product to shift to
the left?
A A rise in household income
B The product becomes more fashionable
C A fall in the price of a substitute
D A fall in the price of a complement
(LO 6.1.2) (2 marks)
46 CA Sri Lanka
Questions
11.12 Which of the following will be expected to cause a supply curve to shift to
the right?
(i) An increase in the cost of factors of production, such as wage costs
(ii) The introduction of a government subsidy
(iii) The introduction of an indirect tax on the good being supplied
(iv) New technology which makes production quicker and cheaper
A (ii) and (iv)
B (i) and (iv)
C (i) and (iii)
D (i), (ii) and (iv)
(LO 6.1.3) (2 marks)
11.13 The raw material, Q, is one of the key resources used in the production of a
good, Finto. The market for Q is currently in equilibrium.
The supply of Finto has recently increased.
What impact will this change have on Q's market equilibrium?
A Demand for Q will fall, leading to a surplus of Q and causing the price of
Q to fall.
B Supply of Q will increase, leading to a surplus of Q and causing the
price of Q to fall.
C Demand for Q will increase, leading to a shortage of Q and causing the
price of Q to rise.
D Demand for Q will increase, leading to shortages of both Q and Finto.
(LO 6.1.2, 6.1.3, 6.1.4) (2 marks)
11.14 FFF is one of the key raw materials used in the production of Zebops.
Until recently, the markets for FFF and Zebops were both in equilibrium.
However, additional supplies of FFF have just been discovered.
Identify whether this discovery will increase or decrease the following:
Supply of Zebops 
Price of Zebops 
Drop down list:
Increase
Decrease
CA Sri Lanka 47
Required
down list.
(LO 6.1.3, 6.1.4) (2 marks)
11.15 A company produces two products: the A1 and the B2.

Which TWO of the following will be expected to shift the supply curve for A1
to the right?
A A government subsidy for A1
B An increase in the price of A1
C An increase in the price of B2
D Technological advances which reduce the costs of producing B2
E A reduction in the cost of raw materials used to make A1
(LO 6.1.3) (2 marks)
11.16 Which of the following will result in a leftward shift in the supply curve of
professional scientists?
(i) A reduction in government spending on science training
(ii) A fall in the real wage levels of professional scientists
(iii) An increase in salaries being paid to science graduates in non-scientific
jobs in commerce
A (i) and (ii) only
(LO 6.1.3) (2 marks)
11.17 Which of the following scenarios will be expected to occur if improvements

in technology mean that the costs of producing a good are reduced?
A The supply curve for the good will shift to the right, prices will rise and
demand will contract.
B The supply curve for the good will shift to the right, prices will fall and
demand will increase.
C The supply curve for the good will shift to the left, prices will rise and
demand will increase.
D The supply curve for the good will shift to the left, prices will fall and
demand will contract.
(LO 6.1.3) (2 marks)
48 CA Sri Lanka
Questions
11.18 The market price of a product was, until recently, in equilibrium. Now, the
market price is falling.
Which of the following is most likely to have caused this?
A Fall in demand for a complementary product
B Imposition of an indirect tax on the product
C Health scares over the effects of consuming a substitute product
D Rise in the costs of production for the product
(LO 6.1.4) (2 marks)
11.19 Which of the following changes will cause the demand curve for chocolate
to shift to the left?
(i) A rise in the price of chocolate
(ii) Increasing concern about the negative effects chocolate has on health
(iii) A rise in the price of other confectionery which is a substitute for
chocolate
(iv) A fall in consumers' income
A (i) only
B (ii) and (iv) only
C (iii) and (iv) only
D (ii) and (iii) only
(LO 6.1.2) (2 marks)
11.20 Changes in demand for the Ortega product caused by changes in price
alone will be represented on the product's demand curve by:
A A shift to the left in the demand curve
B A shift to the right in the demand curve
C Movements along the demand curve
D None of the above
(LO 6.1.2) (2 marks)
CA Sri Lanka 49
12 Demand and supply analysis

12.1 Which combination of demand and supply curves would be appropriate for a
firm attempting to increase its profits by increasing its market share?
A Inelastic demand, inelastic supply
B Elastic demand, elastic supply
C Inelastic demand, elastic supply
D Elastic demand, inelastic supply
(LO 6.2.1) (2 marks)
12.2 Which of the following statements about elasticities is true?

A If income elasticity is positive, the commodity is called an inferior good
B If two goods are complements, the cross elasticity will be negative
C If price elasticity is greater than 1, demand is said to be inelastic
D Unrelated products would have a cross elasticity of infinity
(LO 6.2.1) (2 marks)
12.3 The following are steps that governments can take to influence certain areas:
A Tax incentives for investment
B Equal opportunities legislation
C Forbid takeovers
D Product safety standards
For each of the following areas, match to the government step from A-D list
above which will positively influence that area?
(i) Output capacity
(ii) Competition
(iii) Employment
(iv) Consumer protection
(LO 6.2.3) (2 marks)
12.4 The total yield from an indirect tax levied on a good is likely to be greatest
when:
A Demand is inelastic, supply is elastic
B Demand is inelastic, supply is inelastic
C Demand is elastic, supply is elastic
D Demand is elastic, supply is inelastic
(LO 6.2.1) (2 marks)
50 CA Sri Lanka
Questions
12.5 Identify whether the following statements are true or false.

If consumers only spend a small proportion of their 
income on a good, demand for that good will be highly
price elastic.
A good for which there are a large number of close 
substitutes will be highly price elastic.
Drop down list:
True
False
Required
down list.
(LO 6.2.1) (2 marks)
12.6 The table below shows how the price and quantity supplied of a product
changed between two consecutive months:
Date Price Quantity
1 January 20X1 Rs 50,000 4,000
1 February 20X1 Rs 52,000 4,400
Using the simple (non-average arc) method, what is the price elasticity of
supply of the product?
A 0.5
B 2.0
C 2.36
D 2.5
(LO 6.2.1) (2 marks)
Supply is likely to be inelastic if firms have lots of spare 

capacity.
Supply is likely to be more elastic in the short run than the 
long run.
Drop down list:
True
False
CA Sri Lanka 51
Required
down list.
(LO 6.2.1) (2 marks)
12.8 If the demand for a good is price inelastic, which of the following is true?
A When the price of the good rises, the quantity demanded falls but total
expenditure on the good increases.
B When the price of the good rises, the quantity demanded falls and total
expenditure on the good decreases.
C When the price of the good rises, the quantity demanded rises and total
expenditure on the good increases.
D When the price of the good rises, the quantity demanded falls but total
expenditure on the good is unchanged.
(LO 6.2.1) (2 marks)
12.9 Which of the following is most likely to reduce the price elasticity of demand
for a product?
A Increased passage of time since prices changed
B Greater availability of substitutes
C High costs to consumer of switching to a substitute product
D Lower product differentiation
(LO 6.2.1) (2 marks)
12.10 Which THREE of the following are likely to mean that the supply of a
product is price elastic?
A There is a shortage of a raw material needed to make the product.
B There are high levels of unemployment among workers with the skills
required to make the product.
C The firm making the product has spare capacity in its manufacturing
process.
D It is difficult for the firm to switch resources away from producing
alternative products.
E The firm has high inventory levels of the finished product.
(LO 6.2.1) (2 marks)
52 CA Sri Lanka
Questions
12.11 The firm's managers are trying to understand why the price elasticity of
demand for Lentos is higher than that for Prestos.
Which of the following will increase the price elasticity of demand for a
good?
(i) A large and increasing number of substitutes
(ii) A rise in the proportion of household income spent on the good
(iii) An increase in consumer incomes
(iv) A decrease in the price of complementary goods
A (i) and (ii)
B (i), (iii) and (iv)
C (ii) and (iv)
D (ii) and (iii)
(LO 6.2.1) (2 marks)
12.12 If a firm increases its price, which TWO of the following is true, if price
elasticity of demand is unitary?
A Total costs will fall.
B Total profit will fall.
C The number of units sold will remain the same.
D Total revenue will stay the same.
(LO 6.2.1) (2 marks)
12.13 A government introduces a minimum price below free market price.
Which of the following describes the expected consequences of this?
A There will be no effect on market price or producer incomes.
B Suppliers will withdraw from the market due to falling incomes.
C Unsold surpluses of the product will build up.
D Demand for the product will contract.
(LO 6.2.3) (2 marks)
12.14 Which of the following would be expected to occur following the
introduction of a maximum price policy?
(i) Lower total expenditure by consumers
(ii) Shortage of the product
(iii) Higher incomes for producers
A (i) and (ii) only
(LO 6.2.3) (2 marks)
CA Sri Lanka 53
PART G QUESTIONS: PRODUCTION, COST, PRICE AND OUTPUT DECISIONS

Questions 13 and 14 cover Production, cost, price and output decisions, the
subject of Chapters 14 and 15 of the Study Text.
13 Production and cost functions

13.1 What is marginal cost?
A The addition to total cost of producing one more unit of output
B The total cost dividend by the quantity produced
C The total fixed costs and the total variable cost
D The difference between fixed and variable cost
(LO 7.1.2) (2 marks)
13.2 If a firm's long-run cost per unit is falling:
A There are economies of scale in production
B There are diseconomies of scale in production
C Costs per unit increase as output increases
D Costs per unit remain constant as output increases
(LO 7.1.3) (2 marks)
13.3 The long-run average cost curve for a business will eventually rise because
of:
A The law of diminishing returns
B Increasing competition in the industry
C Limits to the size of the market for the good
D Diseconomies of scale
(LO 7.1.3, 7.1.4) (2 marks)
13.4 Large firms can benefit from economies of scale, and gain a cost advantage
over smaller competitor firms. In spite of this, small firms in industry
manage to survive, and there are several reasons for this.
Which of the following is NOT a reason for the survival of the small firm?
A The minimum efficient scale of production is at a relatively low level of
output
B Large firms suffer from increasing returns at higher volumes of output
C Small firms are able to fragment the market through product
differentiation
D Large firms are often bureaucratic and inefficient
(LO 7.1.4) (2 marks)
54 CA Sri Lanka
Questions
13.5 Which of the following statements best describes the difference between a
straight-line and a curvilinear total cost curve?
A A straight line total cost curve assumes constant fixed costs
B A straight line total cost curve assumes constant variable costs
C A straight line total cost curve assumes constant fixed costs per unit
D A straight line total cost curve assumes constant variable cost per unit
(LO 7.1.5) (2 marks)
13.6 Which of the following statements best describes the behaviour of a total
cost curve in the short run as output rises?
A The total cost curve gets progressively shallower because fixed costs
are being spread over a larger volume of output
B The total cost curve gets progressively shallower as efficiency in
production falls
C The total cost curve initially gets shallower as efficiency increases but
then begins to get steeper as efficiency falls
D Total costs initially fall, then they begin to rise at high output levels
(LO 7.1.2) (2 marks)
13.7 Which of the following statements about marginal cost is true?

A Marginal costs rise as output does
B Marginal costs include fixed costs
C Marginal cost is total variable costs divided by total output
D Total variable costs for 10 units is the sum of the marginal costs for
units 1 to 10
(LO 7.1.2) (2 marks)
13.8 Large firms can benefit from economies of scale, and gain a cost advantage
over smaller competitor firms. In spite of this, small firms in industries
manage to survive, and there are several reasons for this.
Which of the following help to explain the survival of small firms?
(i) The minimum efficient scale of production is at a relatively low level of
output.
(ii) Large firms achieve increasing returns at higher volumes of output.
(iii) Small firms are able to fragment the market by focusing on specific
segments within a market.
(iv) Large firms are often bureaucratic and inefficient.
CA Sri Lanka 55
A (i) and (iii)

B (i), (ii) and (iv)
C (ii) and (iv)
D (i), (iii) and (iv)
(LO 7.1.4) (2 marks)
13.9 Which of the following is NOT a source of economies of scale?

A The introduction of specialist capital equipment
B Purchasing raw materials and other inputs in bulk
C The employment of specialist managers
D Cost savings resulting from new production techniques
(LO 7.1.4) (2 marks)
13.10 The graph below shows how the cost per unit of producing a good (average
cost) varies according to the level of output.
Identify, on the firm's average cost curve, the level of output at which it stops
benefiting from economies of scale.
Average cost
A
D
B C
Output
A Point A
B Point B
C Point C
D Point D
(LO 7.1.4) (2 marks)
13.11 Which of the following is a variable cost to a firm?

A Variable rate mortgage payments
B The cost of raw materials
C Depreciation on a new machine
D Monthly rent payments to lease the firm's warehouse building
(LO 7.1.2) (2 marks)
56 CA Sri Lanka
Questions
13.12 Which THREE of the following are internal economies of scale for a firm?
A The firm is able to reduce administration costs per unit of output when
it opens a second production plant.
B The firm can buy raw materials at lower prices than smaller firms are
able to because it buys in bulk.
C The firm benefits from working with marketing firms which specialise
in advertising and selling similar products.
D The firm can obtain finance at lower interest rates than smaller firms
which the bank thinks are more likely to default on their loans.
E The firm's training costs are reduced because it can draw on a pool of
highly skilled labour available in its region.
(LO 7.1.4) (2 marks)
13.13 A firm is suffering from diseconomies of scale.

Identify whether the following statements about the firm are true or false.
The firm's average costs will decrease as its level of 

production increases.
The firm should increase its level of production in order to 
increase efficiency.
Drop down list:
True
False
Required
down list.
(LO 7.1.4) (2 marks)
CA Sri Lanka 57
14 Profit maximisation
14.1 The supply curve of a firm operating in a competitive market is its:
A Marginal cost curve above the average variable cost curve
B Marginal cost curve above the average total cost curve
C Average total cost curve beyond the point where the marginal cost
curve cuts it from below
D Average variable cost curve below the average revenue curve
(LO 7.2.2) (2 marks)
14.2 According to the theory of the firm, which of the following statements
describes an oligopoly?
A There are no barriers to entry into or exit from the market
B There is only one producer in the market
C There are four producers exerting considerable influence in the market
D There are many producers but they each use product differentiation to
distinguish themselves from each other
(LO 7.2.1) (2 marks)
14.3 ABC produces a variety of soft drink. It has two competitors but all three
producers use product differentiation to distinguish themselves from each
other. What type of market is this?
A Perfect competition
B Monopoly
C Monopolistic competition
D Oligopoly
(LO 7.2.1) (2 marks)
58 CA Sri Lanka
Questions
14.4 The table below shows the total volume of sales in four industries, and the
number of units which have to be sold per month to enable a firm in each
industry to achieve its minimum efficient scale.
Industry Total industry sales Minimum efficient scale

(units sold) (units sold)
A 14,000 2,000
B 6,000 1,500
C 9,000 1,500
D 2,000 400
Based on the information in the table, which industry would be expected to

have the highest level of market concentration?
A Industry A
B Industry B
C Industry C
D Industry D
(LO 7.2.3) (2 marks)
14.5 In the market for the Braddin, a basic and homogenous product, competitors
tend not to compete through price competition, but rather devote
substantial sums of money to raising consumer awareness of branding and
product availability. There are only a small number of large companies
competing in the market.
It would appear, therefore, that the market for the Braddin product is one
characterised by:
A Monopolistic competition
B An oligopoly
C Perfect competition
D A monopoly
(LO 7.2.1) (2 marks)
CA Sri Lanka 59
PART E QUESTIONS: ROLE OF ECONOMICS IN BUSINESS

Questions 15 to 18 cover the Role of economics in business, the subject of Chapter
16 of the Study Text.
15 Macroeconomic forces and business decisions

15.1 Are the following statements true or false?
1 Frictional unemployment will be short term.
2 Governments can encourage labour mobility if they want to reduce
unemployment.
A Both statements are true.
B Statement 1 is true and statement 2 is false.
C Statement 1 is false and statement 2 is true.
D Both statements are false.
(LO 8.1.5) (2 marks)
15.2 Which of the following is most likely to lead to an increase in aggregate

demand in an economy?
A Increased saving
B Increased spending on imports
C Increased taxation
D Increased investment
(LO 8.1.2) (2 marks)
15.3 Estland has recently experienced increased levels of spending on imports in

place of domestically produced goods and services.
Which of the following will result from this?
A Aggregate supply in Estland will shift to the right; national income will
fall
B Aggregate supply in Estland will shift to the left; national income will
rise
C Aggregate demand in Estland will shift to the right; national income
will rise
D Aggregate demand in Estland will shift to the left; national income will
fall
(LO 8.1.3) (2 marks)
60 CA Sri Lanka
Questions
15.4 Which of the following statements about the recession phase of the trade
cycle is correct?
A It is often caused by excessive consumer expenditure
B It is normally characterised by accelerating inflation
C It is often characterised by high levels of unemployment
D It is usually caused by increasing aggregate monetary demand
(LO 8.1.4) (2 marks)
15.5 The economy of a country has been suffering from recession, so the
Government's macroeconomic policy objective is to expand the overall level
of economic activity in the country.
Which of the following measures are consistent with that objective?
(i) Increasing public sector expenditure
(ii) Lowering interest rates
(iii) Increasing taxation
A (i) only
B (i) and (ii)
C (i) and (iii)
D (ii) and (iii)
(LO 8.1.4) (2 marks)
15.6 Until recently, the two countries of Effland and Geeland had a similar level of
national income per capita. Both are open economies, and the value of goods
they import has historically been very similar.
However, they are in different parts of the world, and Effland's economy has
recently been enjoying a boom period while Geeland has been suffering from
a recession.
Based on the implications of the trade cycle for a country's economy,
indicate whether the following are true or false.
The rate of unemployment is likely to be higher in Effland 
than Geeland.
The rate of inflation is likely to be higher in Effland than 
Geeland.
The level of imports into Effland is likely to be higher than 
into Geeland.
Drop down list:
True
False
CA Sri Lanka 61
Required
down list.
(LO 8.1.4) (2 marks)
15.7 Which of the following shows the correct sequence of the phases of the trade
cycle?
A Boom, recession, recovery, depression, boom etc
B Recession, recovery, boom, depression, recession etc
C Depression, recovery, boom, recession, depression etc
D Recovery, recession, boom, depression, recovery etc
(LO 8.1.4) (2 marks)
15.8 Ipland has been suffering from increasing levels of cyclical (demand-
deficient) unemployment in recent years, and the Government is considering
ways to reduce the unemployment level.
Which of the following is likely to be the best way to tackle cyclical
unemployment?
A Reduce the level of government spending in the economy
B Make more training available for the unemployed
C Reduce the level of interest rates
D Manage the foreign currency reserves to increase the exchange rate
(LO 8.1.5) (2 marks)
16 Inflation
16.1 Which of the following organisations might benefit from a period of high
price inflation?
A An organisation which has a large number of long term payables
B An exporter of goods to a country with relatively low inflation
C A large retailer with a high level of inventory on display and low rate of
inventory turnover
D An organisation with low levels of borrowings
(LO 8.2.2) (2 marks)
62 CA Sri Lanka
Questions
16.2 Country X is currently suffering from cost-push inflation. Country X has

relatively few natural resources, so manufacturing firms in the country have
to import a large proportion of the materials they need for their production
processes.
Which of the following measures could help to tackle the problem of cost-
push inflation in Country X?
(i) Introducing a sales tax on manufactured products
(ii) Weakening the power of trade unions
(iii) A decision by global oil producers to restrict oil production
(iv) A revaluation of Country X's currency
A (i), (ii) and (iii)
B (i), (ii) and (iv)
C (ii), (iii) and (iv)
D (ii) and (iv) only
(LO 8.2.2) (2 marks)
16.3 Which TWO of the following are ways a government may seek to reduce the
rate of demand-pull inflation in an economy?
A Reducing interest rates
B Increasing direct taxes
C Applying more stringent controls over bank lending
D Increasing the budget deficit
E Increasing the money supply ('quantitative easing')
(LO 8.2.2) (2 marks)
17 Exchange rates in competitive markets

17.1 Which of the following is associated with a negative public sector net cash
requirement?
A The government is running a budget deficit.
B The government's expenditure exceeds its income.
C The government is running a budget surplus.
D Public sector debt repayment (PSDR) is high.
(LO 8.1.2) (2 marks)
CA Sri Lanka 63
17.2 The currency in country X is the Krone while country Y uses the Euro.
Country Y has recently experienced an increase in its exchange rate with
Country X. Which of the following effects is likely to result in Country Y?
A A stimulus to exports in Country Y
B An increase in the costs of imports from Country X
C Reducing demand for imports from Country X
D A reduction in the rate of cost push inflation
(LO 8.3.1) (2 marks)
17.3 The following, with one exception, are 'protectionist measures' in

international trade. Which is the exception?
A Import quotas
B Subsidies for exporters
C Customs procedures
D Tariffs
(LO 8.3.3) (2 marks)
17.4 Which of the following is most likely to cause a country's balance of

payments current account to move towards a deficit?
A A devaluation of that country's currency
B An expansionary fiscal policy
C Government subsidies to domestic producers
D A rise in the rate of domestic saving
(LO 8.3.3) (2 marks)

A marked deterioration in Sri Lanka's balance of trade will 
lead to an increase in the value of Rs LKR.
A deterioration in the balance of trade will lead to a 
reduction in demand for foreign currency to pay for imports.
Drop down list:
True
False
Required
down list.
(LO 8.3.3) (2 marks)
64 CA Sri Lanka
Questions
17.6 Which of the following will typically raise (appreciate) the exchange rate for
a country's currency?
(i) A fall in the value of imports into the country
(ii) A rise in foreign investment in the country
(iii) A fall in interest rates in the country
A (i) and (ii) only
(LO 8.3.3) (2 marks)
17.7 The exchange rate for Japanese yen against the US dollar has moved from
110 yen per $ to 120 yen per $. Demand from US customers for goods
imported from Japan is price elastic.
What will be the impact of the movement in the exchange rate?
A US customers will find Japanese goods more expensive and
expenditure on goods imported from Japan will increase.
B US customers will find Japanese goods cheaper and expenditure on
goods imported from Japan will increase.
C US customers will find Japanese goods more expensive and
expenditure on goods imported from Japan will decrease.
D US customers will find Japanese goods cheaper and expenditure on
goods imported from Japan will decrease.
(LO 8.3.3) (2 marks)
17.8 Under a system of freely floating exchange rates, what will be the most likely
outcome of a fall in the inflation rate in Exland relative to the rates of
inflation in Exland's major trading partners?
A A fall in demand for exports from Exland
B An increase in the foreign exchange rate of Exland's currency
C A decrease in the supply of the currencies of Exland's trading partners
D An increase in Exland's interest rate
(LO 8.3.3) (2 marks)
CA Sri Lanka 65
17.9 Which of the following will be expected to result from a decision to reduce
interest rates in a country?
(i) Increased sales as result of higher disposable income for customers
(ii) Higher business profits as a result of increased sales and lower interest
expenses for businesses
(iii) Lower import costs for companies in the country as the value of the
country's currency strengthens against other currencies
A (i) and (ii) only
(LO 8.3.3) (2 marks)
17.10 Which of the following could cause a country's balance of payments current
account to move towards a surplus?
A A rise in the volume of commodity imports
B An inflow of foreign capital into the economy
C An increase in foreign tourism into the country
D An increase in the Government's tax receipts
(LO 8.3.3) (2 marks)
17.11 The high rate of inflation in Country D's economy has led to a deterioration
in its balance of payments current account.
Which of the following are valid reasons which could explain this?
(i) Export sales have fallen as the rate of inflation has made Country D's
exports less competitive.
(ii) Higher domestic prices have made imported goods more attractive in
Country D.
(iii) Excess demand from consumers in Country D has reduced the volume
of goods available for export.
A (i) and (ii) only
(LO 8.3.3) (2 marks)
66 CA Sri Lanka
Questions
17.12 Companies in Country B rely on exports to surrounding countries for a

significant proportion of their revenue, because their productive capacity is
greater than that required to satisfy domestic demand. However, in recent
years, Country B has had a small deficit on its balance of payments current
account due to the volume of products and services it imports.
Following a change in the Government's macroeconomic policy, the economy
in Country B is now growing more rapidly than that of its trading partners.
Identify whether this change in growth rates will be expected to increase or
decrease the following:
Quantity of exports from Country B to its trading partners 
Quantity of imports into Country B from its trading 
partners
Balance of payments current account deficit 
Drop down list:
Increase
Decrease
Required
down list.
(LO 8.3.3) (2 marks)
17.13 Country DDD has an open economy (ie it trades with other countries).
Consumers in Country DDD purchase products from firms in foreign
countries, while firms in Country DDD export products to consumers in
other countries.
The value of Country DDD's currency relative to other currencies is
determined through a floating exchange rate.
Identify whether the following would be expected to lead to an appreciation
(increase) or depreciation (decrease) in the value of Country DDD's
currency.
A contractionary fiscal policy in Country DDD causing a 
reduction in the level of consumer spending in Country DDD
A reduction in the rate of inflation in Country DDD making 
exports from Country DDD more competitive in foreign
countries
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Drop down list:

Appreciation
Depreciation
(LO 8.3.3) (2 marks)
17.14 Assume that demand for imports in Sri Lanka is elastic.

Indicate what would be expected to happen to the following if £ sterling
depreciates in value against the currencies of other countries.
The price, in Rs LKR, of imported goods 
Total spending by the UK on imported goods 
Drop down list:
Decrease
Increase
Required
down list.
(LO 8.3.3) (2 marks)
17.15 Which THREE of the following are 'protectionist measures' in international

trade?
A Import quotas
B Trade deficits
C Subsidies for local producers
D Outsourcing
E Fixed exchange rates
F Tariffs
(LO 8.3.3) (2 marks)
68 CA Sri Lanka
Questions
17.16 Country X is a major producer and exporter of steel.

Country M imports steel from Country X, but the Government of Country M is
trying to protect its domestic steel industry, and has imposed a tariff on steel
imported from Country X.
Demand in Country M for steel imported from Country X is relatively price
inelastic.
Identify whether the following will increase or decrease as a result of the
Government imposing the tariff.
Demand in Country M for steel from Country X 
Expenditure in Country M on steel imported from 
Country X
Total revenue in Country X from steel exported to 
Country M
Drop down list:
Decrease
Increase
Required
down list.
(LO 8.3.3) (2 marks)
17.17 Which of the following is NOT a consequence of international trade?

A Countries can specialise in products in which they have a natural
advantage
B It may lead to the purchase of dangerous or unethical imported
products
C The creation of external economies of scale
D An increase in the impact of the recession phase of the trade cycle
(LO 8.3.3) (2 marks)
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18 Monetary and fiscal policy

18.1 Which of the following is NOT an element of fiscal policy?
A Government spending
B Government borrowing
C Taxation
D Exchange rates
(LO 8.4.2) (2 marks)
18.2 ________________ taxes are collected by the Revenue authority from a business,
which attempts to pass on the tax to consumers in the price of goods.
Which word correctly completes this statement?
A Progressive
B Direct
C Indirect
D Income
(LO 8.4.2) (2 marks)
18.3 If a government has a macroeconomic policy objective of expanding the

overall level of economic activity, which of the following measures would not
be consistent with such an objective?
A Increasing public expenditure
B Lowering interest rates
C Increasing taxation
D Decreasing taxation
(LO 8.4.2) (2 marks)
18.4 Monetary policy is a government economic policy relating to:

(i) Interest rates
(ii) Taxation
(iii) Public borrowing and spending
(iv) Exchange rates
Which of the above are correct?
A (i) and (iv)
B (ii) and (iii)
C (ii) and (iv)
D (iii) and (iv)
(LO 4.6.1) (2 marks)
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Questions
18.5 Which of the following will be the most likely consequences of an increase in
the money supply?
A Interest rates rise, investment spending rises, and aggregate demand
rises
B Interest rates rise, investment spending falls, and aggregate demand
falls
C Interest rates fall, investment spending falls, and aggregate demand
falls
D Interest rates fall, investment spending rises, and aggregate demand
rises
(LO 4.6.1) (2 marks)
18.6 Mixiland is currently suffering from high levels of inflation, and the
Government of Mixiland wants to use deflationary fiscal policy to bring
inflation levels under control.
Which of the following measures would be expected in Mixiland?
(i) Tax increases
(ii) Increasing the budget deficit
(iii) An interest rate rise
A (i) only
D All of the above
(LO 4.6.2) (2 marks)
18.7 Bali Co is based in a country whose government wants to pursue an

expansionary fiscal policy in response to current economic conditions in the
country.
Which TWO of the following should Bali Co expect to see specifically as a
result of the Government's policy?
A Increases in the rates of taxation on company profits
B Increases in tax allowances for investment in capital equipment
C Increasing levels of government expenditure
D Reductions in interest rates
E Reductions in the level of borrowing
(LO 4.6.2) (2 marks)
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18.8 Bizzi Co manufactures and sells consumer electronic goods, such as

refrigerators, microwave ovens and washing machines.
The Government in the country in which Bizzi Co operates has recently
increased interest rates.
Indicate whether the following statements about the consequences of the
change in interest rates are true or false.
The level of investment Bizzi Co makes in new capital 
equipment will be expected to fall.
The level of consumer demand for Bizzi Co's products will 
be expected to fall.
Drop down list:
True
False
Required
down list.
(LO 4.6.2) (2 marks)
18.9 Which of the following correctly describes the purpose of supply side policy?
A To raise the level of aggregate demand in an economy
B To manage the money supply in an economy
C To improve the ability of an economy to produce goods and services
D To reduce unemployment by reducing the supply of labour
(LO 4.6.2) (2 marks)
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Questions
18.10 Which of the following statements regarding government monetary and

fiscal policy is correct?
A Monetary policy includes policies on interest rates and public
borrowing while fiscal policy includes policies on exchange rates and
public spending.
B Monetary policy includes policies on public borrowing and public
spending while fiscal policy includes policies on interest rates and
exchange rates.
C Monetary policy includes policies on interest rates and exchange rates
while fiscal policy includes policies on public borrowing and public
spending.
D Monetary policy includes policies on exchange rates and public
spending while fiscal policy includes policies on interest rates and
public borrowing.
(LO 8.4.1, 8.4.2) (2 marks)
18.11 Which of the following represents a contractionary fiscal stance by the

government?
A Increased borrowing and spending
B Increased taxation but no increase in spending
C Increased taxation and spending
D Decreased taxation but an increase in spending
(LO 8.4.2) (2 marks)
18.12 If a government has a macroeconomic policy objective of expanding the

overall level of economic activity, which of the following measures would
NOT be consistent with such an objective?
A Increasing public expenditure
B Lowering interest rates
C Increasing taxation
D Decreasing taxation
(LO 8.4.2) (2 marks)
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18.13 Match the following economic tools and indicators with the relevant type of
government policy from the drop down list below.
Control of the money supply 

Interest rates 
Government spending 
Exchange rates 
Government borrowing 
Drop down list:
Fiscal policy
Monetary policy
Required
down list.
(LO 8.4.1, 8.4.2) (2 marks)
74 CA Sri Lanka
76 CA Sri Lanka
Answers
PART A QUESTIONS: BUSINESS AND ORGANISATIONAL ENVIRONMENT
1 Introduction to organisational environment

1.1 C Collective goals or aims are a feature of organisations.
1.2 C Such an organisation is part of the public sector. The voluntary sector
comprises charities and other organisations whose members are
volunteers. Private sector comprises non-governmental organisations,
such as limited companies. A partnership is a business arrangement in
which all partners manage the business and are liable to some degree
for its debts.
1.3 B Measures such as value for money or efficiency are often used in not-
for-profit organisations such as local authorities.
1.4 D NPOs are often stopped from realising their goals by a lack of money.
But making money is not their primary goal.
1.5 B A frequent performance objective in not-for-profit organisations is

achieving value for money, where value for money is assessed in
relation to economy, efficiency and effectiveness.
Point (1) relates to economy – keeping input costs as low as possible
while still being able to achieve the level of quality required.
Point (3) relates to efficiency – generating the maximum output
possible from the resources being used.
Not-for-profit organisations do not have shareholders, and their aims
are not primarily financial. Therefore, point (2) is not correct.
1.6
Client 1 – 'Shareholders vote against directors' Profit-seeking
remuneration at AGM'
Client 2 – 'Dividends increased despite slight fall in Profit-seeking
sales'
Client 3 – 'Hospital forced to cut staff in face of Not-for-profit
government funding cuts'
One of the characteristics which distinguish profit-seeking
organisations from not-for-profit ones is their ownership structure. By
definition, companies (profit-seeking organisations) are owned by
shareholders – therefore, Client 1 must be a profit-seeking organisation.
Similarly, dividends are paid to shareholders, meaning that Client 2 is
also a company (a profit-seeking organisation).
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By contrast, the hospital (Client 3) appears to be government funded

(public sector), meaning that it is a not-for-profit organisation.
1.7 A company whose shares are bought and sold on Private sector
a stock market
A police force Public sector
A football club controlled by its supporters Mutually owned
Although a company whose shares are bought and sold on a stock

market is referred to as a public limited company, it operates in the
private sector where it seeks to generate a profit for its shareholders.
Police forces are public sector organisations, which are funded by local
authorities and whose primary objectives will be to ensure that law
and order are maintained in local communities rather than to make a
profit.
The key feature of mutual organisations is that they are owned by their
customers. A football club's supporters are its customers, so a club run
by its supporters will be mutually owned.
1.8 Organisation 1 – To prevent crime and protect local Not-for-profit

communities, and bring to justice those people who
commit offences
Organisation 2 – Maintain recent growth rates in Profit-seeking
order to increase market share
Organisation 3 – Achieve favourable pay, benefits Not-for-profit
and safe working conditions for members
Organisation 1 is describing some of the typical aims of a police force.
Police forces are not-for-profit, public sector organisations.
For organisation 2, although there isn't any specific reference to
'profit', the reference to increasing market share indicates that this
organisation is directly competing against other organisations. This is
one of the key characteristics of commercial, profit-seeking
organisations.
Organisation 3 is describing some of the typical aims of a union.
Although unions are not public sector organisations, they are still
not-for-profit. The reference to 'members' is the key word here –
highlighting that the union is working to support the interests of its
members, rather than to generate a profit for owners.
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Answers
1.9 A, B Organisational goals should reflect common goals that individuals

work towards.
Control systems may be informal, especially for small organisations;
not all organisations use variance analysis.
1.10 B All these groups have a legitimate stake in the enterprise: the
government, as a regulator; employees, as participants in the business;
and environmental pressure groups and local residents, because of
potential impacts.
Employees as a group are unlikely to be affected by the change.
1.11 A, C Return on investment will be of greatest importance to shareholders

and bankers – both of whom have a direct financial interest in how well
the company is performing.
1.12
Stakeholder group Type of stakeholder
Perway's customers Connected
Perway's staff Internal
Trade unions representing Perway's staff External
Perway's bank Connected
Environmental pressure groups complaining External
about pollution from Perway's factories
Perway's suppliers Connected
Employees and management are internal stakeholders.

Connected stakeholders typically include customers, suppliers,
shareholders and other providers of finance (eg a company's bank)
External stakeholders include pressure groups, governments and
regulators, and local communities.
1.13 A The macro (external) environment exerts an influence over the

organisation, rather than the other way around. It is beyond the
organisation's control.
1.14 D Both of these statements are false.
Business ethics and corporate social responsibility are not the same,
though they do have areas of overlap; A business managed with the
sole objective of maximising shareholder wealth can be run in just as
ethical a fashion as one in which far wider stakeholder responsibility
is assumed.
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1.15 A Social organisations such as businesses are open systems. This is

because social systems are made up of human beings, each of whom
will be exposed to external environmental influences.
1.16 C The task environment is the external environment of an organisation

that influences its ability to reach its goals. Customers, suppliers and
potential employees are therefore all part of the task environment.
Existing employees are internal to the organisation and therefore part
of the internal environment.
1.17 D Government regulation of the industry. The other forces are bargaining
power of suppliers and rivalry amongst current competitors in the
industry.
1.18 Scale economies available to existing competitors Yes

Low capital investment requirements No
Low switching costs in the market No
Loyalty to existing brands Yes
Low switching costs means that it will be easy for customers to change
from existing suppliers to a new supplier: this would facilitate entry to
the market, as would low start-up costs.
The other options should clearly pose difficulties to a new entrant: not
yet big enough to benefit from economies of scale (against competitors
who are); high degree of recognition of and loyalty to existing brands.
1.19 B The self-review threat may occur when a previous judgement needs to
be re-evaluated by the professional accountant responsible for that
earlier judgement.
1.20 B, C Ethics are a set of shared moral principles that guide our behaviour
1.21 B Complying with legal requirements is not a specific element of CSR,

although socially responsible companies should act ethically and would
be expected to comply with the law.
CSR relates to an organisation's obligation to minimise the negative
effects it has on society, and to promote the positive effects it has.
1.22 B, D If there are a lack of substitutes then the customer has less choice of
suppliers and similarly if the product is highly differentiated.
1.23 B Closer relationships with a supplier can help improve quality and
reduce costs.
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Answers
1.24 C Increasing diversity has an impact on HR policies in regard to equal

opportunity and prevention of discrimination. Falling birth-rates
creates an aging workforce and skill shortages. All organisations need
to take account of environmental regulation and consumerism. An
increase in single-member households will impact on some
organisations: notably, those which market goods and services to this
segment (eg single-serve pack sizes), but the question said 'most'
organisations.
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PART B: NATURE AND SCOPE OF BUSINESS MANAGEMENT
2 Businesses management
2.1 B The monitor role involves scanning the environment and gathering
information from a network of contacts. As spokesperson, the manager
can then provide information on behalf of the department or
organisation to interested parties. As disseminator, (s)he can also
spread relevant information to team members. The role of leader
means hiring, firing and training staff.
2.2 B Drucker grouped the work of the manager into five categories, the fifth
being developing people. The other options are from Mintzberg's
managerial role types.
2.3 C The management process is made up of planning, organising, leading
and controlling.
2.4 A The goal approach to effectiveness measures effectiveness by
comparing actual business performance with its stated objectives.
2.5 Reduction, or containment of cost Economy
The ability to realise missions and goals Effectivenes
Production of the maximum output with a given set Efficiency
of resource inputs
2.6 D Katz proposed that leaders should possess technical, human and
conceptual skills.
2.7 D Leading is concerned with generating effort and commitment towards
meeting objectives, including the motivation of staff.
2.8 B Effectiveness is measured by the organisation's performance in
achieving its goals and targets. The amount of resources used for the
tasks that have been achieved (A) would be a measure of efficiency.
Team member satisfaction and the motivational climate cannot be used
to measure economy (C). Economy would be measured by the success
of the team or work group in controlling its costs (D).
2.9 C This is part of Scientific Management, pioneered by Taylor.
2.10 C The correct answer is: Creating the maximum output for minimum
input.
Efficient and effective business processes create the maximum output
for the minimum input. Quality and value for money are not relevant to
efficiency and effectiveness.
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Answers
PART C: FUNCTIONS OF MANAGEMENT
3 Planning and control

3.1 B The correct answer is Authority, as being the 'right' to perform an
action. Responsibility is the duty to perform an action. Power is the
ability to perform an action (and in particular, to influence others).
Influence is a process by which a person can direct or modify the
behaviour of another person.
3.2 B Budgets are short-term plans, usually covering the period of a year.
They are linked, however, to the longer term plans of the organisation
and should support the ultimate achievement of those goals.
3.3 B Planning helps organisations to take a long view and avoid short-
termism.
3.4 A The criteria suitability, acceptability, and feasibility is used to assess

strategies.
3.5 C SMART objectives are Specific, Measurable, Achievable, Realistic (or

results-focused, or relevant); and Time-bound.
3.6 B Making optimum use of the required resources refers to the organising
task. This allows the plans to be successfully implemented.
4 Organising
4.1 B The more supervisory work in a managers workload the less
delegation of authority will take place.
4.2 B While there may be elements of functional and geographical

organisation, Y plc's situation suits divisionalisation: more or less
autonomous product and regional businesses, with co-ordination from
head office. 'Diversification' and 'acquisition' are good pointers to
divisionalisation.
4.3 C Matrix organisation is based on dual command: the classical principle

of unity of command is 'one person, one boss'.
4.4 D This describes a boundaryless organisation. A hollow organisation

splits people and activities into core and non-core. In modular
organisations different elements or components of the product or
service the organisation produces are outsourced to different
suppliers. In a jobless structure the employee becomes not a job-holder
but a seller of skills.
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4.5 A The span of control is defined as the number of employees reporting to

one manager.
4.6 A clear hierarchical structure is in place Mechanistic

Flatter organisational structures Organic
A culture that embraces change Organic
4.7 D This trend is most directly attributable to technological factors. A

virtual organisation is the collaboration of geographically dispersed
individuals and teams, specifically using the latest information and
communication technology enablers: the Internet, web-conferencing
and so on.
4.8 B Designing systems and standardising work describe the work of the
technostructure of the organisation.
4.9 C (A), (B) and (D) are all identified as advantages of a tall organisational
structure which tends to: create smaller groups so aiding participative
decision-making; provide many steps in the career ladder so assisting
training and succession planning; by virtue of the tall hierarchy,
provide narrow spans of control for managers.
4.10 A No
B Yes
C Yes
D No
E Yes
Mintzberg describes the organisation as having five component parts,
operating core, middle line, strategic apex, technostructure and
support staff.
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Answers
4.11 The correct answers are:
E. Strategic Apex
Techno F. Support Staff

Structure
C. Middle line
D. Operating Core
4.12 A In a matrix structure an employee may report to a line manager as well

as a product or project manager. This encourages employee flexibility
and multiple reporting.
4.13 B Mintzberg's organisation includes: the operating core, technostructure,

middle line, strategic apex and support staff.
4.14 D A virtual company is one that is made up of a number of smaller
individual entities that work on projects together. They have the
benefits of a larger organisation, such as economies of scale and low
cost base, but they are also able to respond to changes to the
environment quickly because they do not have a rigid structure.
The lack of rigid structure means there is often more than one supply
chain – depending on which entity has capacity at any point in time.
4.15 B Virtual team working is made possible by developments in

communications and other technology, enabling people to work
together even when they are not physically located in the same place.
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4.16 The correct answer is:

Delegation is the process whereby a manager assigns part of his
authority accountability
to a subordinate but the manager's can
never be delegated.
Authority is defined as the right to do something or ask someone else
to do it.
Accountability can never be delegated as the manager is still
accountable to their own superior for ensuring that the work is done.
5 Leadership, motivation and communication

5.1 B Position power is legitimate organisational authority, by virtue of a
position in the organisation hierarchy: managers depend largely on it
for their influence. Leaders are often required to exercise informal,
interpersonal forms of influence, such as person power (charisma,
inspiration) and expert power (valued knowledge). Physical power
(intimidation) should be used by neither managers nor leaders!
5.2 A Yes
B Yes
C No
D No
E No
Theory Y (D) and the managerial grid (E) make no reference to
remuneration, whilst Herzberg classified remuneration as merely a
hygiene factor (C), useful only for avoiding dissatisfaction and
demotivation, rather than being a positively motivating factor.
5.3 A This is an example of informal communication
5.4 D This is external informal

5.5 A Reports are likely to be communicated upwards
5.6 B Complaints are likely to be communicated upwards
5.7 C The corporate image of the organisation can be carried along in
external communication
5.8 D Feedback is usually evidence that communication has taken place.
5.9 C A report would be most suitable for a large amount of complex
technical information
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Answers
5.10 D Face-to-face meetings to break the bad news and to allow questions.
Because the changes seem to be complex, written material should be
provided setting out the intricacies of the changes and to act as a
reference document.
5.11 D 1:9, the former being concern for task and the latter being concern for
people.
5.12 C Self-autonomy is not part of Maslow's hierarchy of needs. The similar
correct term is self-actualisation
5.13
A reward is the offer or promise of a benefit for True
contribution or success, designed to motivate the
individual or team.
In Vroom's expectancy theory, the lower the values of False
valence and expectancy, the higher the motivation.
According to Herzberg, supervision is a motivating False
factor
5.14 B Behavioural theory states that individuals can be taught how to be

good leaders, whereas traits theory takes the view that leaders are
born, not manufactured. Contingency theory is the view that the most
appropriate leadership style (participative, authoritarian and so on)
depends on the circumstances of the work situation.
5.15 D Transactional leaders are focused on current activities and on
maintaining efficiencies, such as checking scripts and running figures.
They offer incentives to encourage performance. Transformational
leadership builds further on top of these necessary traits of transactional
leadership. Transformational leaders provide individual consideration
and possess charisma. They guide and motivate their followers and they
'lead from the front'. Maduka is showing transformational leadership by
deciding a wide-ranging review of 'how things are done' is required to
look for improvement and implement change.
5.16 A Maslow's theory of motivation describes a hierarchy of needs from

physical needs up to self-actualisation.
5.17 D Force = Valence × Expectation represents Victor Vroom's model of

motivation.
5.18 B Referent power is the power that a person has because they are well
liked.
Coercive power is the power a person has to assign punishment.
Reward power is the power a person has to confer rewards.
Expert power is the power a person has who is perceived to have
expert knowledge.
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5.19 A, C, D
Where the choice of words provoke an emotional response that may
hinder the receiver from receiving the message clearly.
The other two responses will aid communication.
5.20 C Content theories of motivation (eg Maslow, Hertzberg) focus on the

needs of individuals.
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Answers
PART D: FUNCTIONAL AREAS OF BUSINESS
6 Operation management
6.1 C The correct answer is: Replacing inefficient parallel processes with
efficient sequential processes.
If IT is to enhance business processes it is necessary to replace existing

processes with new ones, otherwise the same old processes will
continue. It cannot reduce delays in decision making because it is up to
management when they take a decision.
Replacing separate inefficient parallel processes with efficient

sequential ones means a single, more efficient process that is easier to
control.
Term Process part
Transforming inputs The trained accountant

Transformed inputs The client's transactional data
Outputs The financial statements
Transformation process The audit
The accountant transforms the transactional data by the audit process

into the output (financial statements).
6.3 C Velocity is not correct. The missing element in the list is Variation in
Demand.
6.4 The correct answer is:
In operations management resources are used to create outputs that

fulfil specific market requirements.
This is the process of operations management.
6.5 D The correct answer is: Reduce production bottlenecks.
Optimised production technologies focus on the removal of production

bottlenecks.
6.6 D Lean manufacturing is based on actual demand levels rather than on

plans based on forecast levels of demand.
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7 Marketing management
7.1 D A marketing orientation involves structuring an organisation's
activities around the needs of the customer.
7.2 A The government is not considered to be a customer of a charity.

Beneficiaries, supporters, regulators and stakeholders (including
trustees) are considered to be customers of a charity.
7.3 D With only a small number of potential clients, personal selling will be
the appropriate promotion strategy whilst the specialist nature of the
product and small number of buyers suggest that using intermediaries
would be inappropriate, hence direct distribution
7.4 B The marketing mix is Place, Product, Price and Promotion
7.5 D The aim of segmentation is to allow marketing efforts to be identified

and targeted more effectively by grouping customers by identifiable
characteristics relevant to buying behaviour.
7.6 D Tactical marketing focuses on the short-term and the marketing mix.
Strategic marketing involves identifying the products and markets the
organisation wishes to operate in. Mass marketing involves marketing
to an entire market. Target marketing is focussing marketing effort on
a particular target.
7.7 B Product orientated organisations focus on product features.
7.8 D Undifferentiated marketing involves producing a single product and

getting as many customers as possible to buy it. There is no market
segmentation.
7.9 A An undifferentiated policy involves producing a single product and

hoping to get as many customers as possible to buy it – segmentation is
ignored entirely.
7.10 A Whole market/single product is undifferentiated positioning, a distinct

marketing mix per segment is differentiated targeting. The other
option is incorrect because it refers to a range of products.
7.11 C A product oriented organisation focuses on product development and

features.
7.12 C Marketing is concerned with meeting customer needs of the long term.
Sales, or selling, is concerned with immediate issues of selling the
product in the short term.
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7.13 D Family lifecycle stage, gender and age are examples of demographic
bases for market segmentation.
Hobbies and interests is an example of lifestyle bases for market
segmentation, for example an item of clothing could be specifically
marketed towards people who enjoy camping or outdoor activities.
7.14 C A product orientation involves structuring an organisation's activities

around product development.
7.15 C Organisations may be marketing oriented, sales oriented, product

oriented or production oriented. Lean orientation is a made up term.
7.16 A Distribution channels, transport, warehouse and sales outlets are

examples of the 'place' component in the marketing mix. Promotion
usually describe advertising and physical evidence usually describes
the product's environment in a service industry. The other option is
irrelevant because it refers to a service organisation – the locations in
the question relate to traditional consumer goods.
7.17 B Effective product promotion is centred on customers and

communication. The other options focus on the internal business
rather than the consumers.
7.18 D All options would raise ethical issues. For example. materials used
(pollution), quality of goods (safety), advertising (targeting vulnerable
people), wages (low-pay in developing countries) and packaging
(recyclable).
7.19 B The correct stages and sequence of the product life cycle are
introduction, growth, maturity and decline.
7.20 C Promotion includes all marketing communications which let the public
know about an organisation's products and services.
7.21 D The 7Ps in the extended marketing mix are Product, Price, Place,
Promotion, People, Processes and Physical evidence.
7.22 C Social media may be useful to all types of organisation for a wide range
of purposes. However, the use of existing infrastructure and reliance on
users to spread a message can make it very cost-effective for small
businesses that may not be able to afford other media.
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8 Human resource management

8.1 B A job description is the statement produced from a process of job
analysis which addresses the requirements of the job, rather than the
qualities of the ideal job holder or person.
This is job description rather than job analysis, because a job
description is the statement produced from a process of job analysis.
8.2 C This is a disadvantage because there may not be a clear interview

strategy, and candidates may have trouble switching from one topic to
another.
8.3 C This should have been fairly straightforward. It would be quite difficult
to write a job description or a person specification if a vacancy had not
first been identified.
8.4 D This is a positive and realistic view of the benefits and limitations of
training: not all performance problems are amenable to training, and
may need other sorts of intervention (discipline, counselling,
equipment repair, job re-design, motivation and so on).
8.5 C Day release is 'off-the-job', because the learning comes from the
employee's attending a college or training centre one day per week.
The other methods are all 'on the job'.
8.6 C Remember that recruitment is not the same as selection. C is

recruitment, D is selection.
8.7 D An human resource management strategy should impact upon

financial outcomes (cost of wages etc), behavioural outcomes (staff
discipline etc) and performance outcomes (efficiency and effectiveness
of employees). Processes are decided by those involved in managing
the operation – such as the production director.
8.8 B Under the human resource management approach, employees are

viewed as assets or resources.
8.9 C Assessment centres, interviews and psychometric testing are used in

the selection process.
Advertising copy is part of advertising a vacancy and is therefore part
of the recruitment process.
8.10 B The process where new employees are familiarised with an

organisation is called their induction.
8.11 C Recruitment describes the process attracting suitable candidates to

apply for selection. Interviews and tests are part of selection.
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9 Information management systems and project

management
9.1 B An intranet provides a storage and distribution point for information
accessible to staff.
9.2 D An office automation system increase the productivity of data and

information workers. The other systems listed are part of the
management information system.
9.3 A TPS is a transaction processing system, the day-to-day recording of

transactions.
9.4 D Decision based software provides managers with the information and
analysis tools to enable them to make decisions.
9.5 A Expert systems allow general users to benefit from knowledge and
techniques of human experts.
9.6 A The key aspects of the statement is the management of relationships

and customer information.
An expert system is a database that holds specialised knowledge and
data and allows the user to input information for the system to
interpret and provide a logical decision.
E-commerce is the term that relates to trading activity that takes
advantage of online/internet functionality.
Cloud computing refers to the delivery of computing as a service rather
than a product, whereby shared resources, software, and information
are provided to computers over a network (typically the internet).
9.7 D Of course, the above is based on an ideal scenario where more

resources are available. In real life this is unlikely to be the case.
It will be hard to maintain or increase quality if resources are reduced,
and there is no need to increase quality.
9.8 C This stage ensures that one stage is properly completed before the next
one begins.
Initiation is the stage where scope and objectives are agreed.
Managing product delivery ensures that work done by specialists is
completed to the proper standard.
Project assurance is a distractor.
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9.9 A, B, C, D, E
Teambuilding: The work is carried out by a team of people often from
varied work and social backgrounds. The team must 'gel' quickly and
be able to communicate effectively with each other.
Expected problems: should be avoided by careful design and planning
prior to commencement of work.
Unexpected problems: There should be mechanisms within the project
to enable these problems to be resolved quickly and efficiently.
Delayed benefit: There is normally no benefit until the work is finished.
The 'lead in' time to this can cause a strain on the eventual recipient
who is also faced with increasing expenditure for no immediate benefit.
Potential for conflict: Projects often involve several parties with
different interests. This may lead to conflict.
9.10 Defined beginning and end – projects

Many recurring tasks – business as usual
Full time use of resources – business as usual
9.11 C Style is effectively the culture of the project
9.12 D While individual team members form part of staff, the process of
building the team is part of determining the structure of the project.
9.13 A It is a fundamental aspect of PRINCE2 that a project is driven by its

business case.
9.14 B This is because PRINCE2 planning is based on products rather than

processes.
9.15 The correct order is:

1 Project plan
2 Stage plan
3 Detailed plan
4 Individual work plan
9.16 B The day to day running of the project is the responsibility of the project
manager.
9.17 C Planning is a mechanism of project management.
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9.18 A The success of a project is measured by its ability to meet time, budget
and quality constraints.
9.19 D Compliance with laws and regulations is a constraint within the

planning process. Money and the planning process are both inputs.
Technology is a mechanism.
9.20 D The three constraints of a project are time, cost and quality. Labour is
a resource that comes at a cost.
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PART E: ROLE OF ECONOMICS IN BUSINESS
10 Economics and business

10.1 B The free rider problem relates to a situation where it is not possible to
exclude third parties from consuming a good that someone else has
bought. Non-excludability is one of the characteristics of public goods
(and hence is one of the main reasons why such goods would not be
provided by the free market).
10.2 B Non-diminishability and non-exclusivity (non-excludability) are the

two main defining characteristics of a public good. The 'free rider'
problem (which arises as a result of non-exclusivity) means that
private enterprises will not be prepared to provide the good.
Consequently, it has to be provided through the public sector (national
or local government).
Option A describes a merit good; Option C describes a positive
externality; and Option D describes a negative externality.
10.3 C Economic profits consist of sales revenue minus explicit costs and
implicit costs.
Explicit costs are those which are clearly stated and recorded.
Implicit costs are benefits forgone by not using the factors of
production in their most profitable way.
10.4 B The return that is made to entrepreneurship is profit. Wages is the

return for labour, interest is the return for capital and rent is the return
for land.
10.5 A Inflation, investment and unemployment are all macroeconomic

factors. Price and demand within a particular market is a
microeconomic factor.
10.6 C Normative economics is based on the ideal.
10.7 A Scarcity of resources is the central problem of an economy. Making

choices about how to use scarce resources is the fundamental problem
of economics.
10.8 B Goods whose demand eventually falls as income rises are best
described as inferior goods.
10.9 A The ability of a society to produce all the various combinations of

goods is represented by the production possibility frontier.
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PART F: PRICE MECHANISM AND COMPETITIVE MARKETS
11 Demand, supply and market equilibrium

11.1 C The other options relate to movements along the supply curve.
11.2 D A rise in the price of overseas holidays will lead to a movement along
the demand curve rather than a shift in the demand curve.
11.3 B Generally, if incomes fall, demand will fall.
11.4 D All of the above.
11.5 A Consumer surplus is the excess between what consumers are prepared
to pay for a good or service and the prevailing market price they have
to pay to purchase it.
11.6 C, D, F
11.7 A An inferior good still has a downward sloping demand curve, but less
of the product is demanded when incomes rise.
11.8 D These are all advantages of free trade.
11.9 A A reduction in the cost of producing the discs will cause the supply
curve for DVD discs to shift to the right. If their costs are lower, then
suppliers are prepared to supply more at the prevailing market price.
More generally, an outward (rightward) shift in the supply curve means
that output will increase at all prices. Consequently, the price of the
discs will fall and more discs will be supplied.
11.10 D An advertising campaign for foreign holidays will be expected to lead

to a rise in the demand for foreign holidays (ie the demand curve shifts
to the right). Similarly, a rise in the price of domestic holidays will
make foreign holidays relatively more attractive – meaning the
demand curve for foreign holidays shifts to the right.
A fall in the disposable incomes of consumers will be expected to lead
to a fall in the demand for foreign holidays, because although
consumers might still want a holiday they will be less able to pay for
one. In this case, the demand curve shifts to the left.
However, a rise in the price of foreign holidays will lead to a movement
along the demand curve, rather than a shift in the demand curve.
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11.11 C As the price of a substitute falls, demand will transfer to the substitute,
leading to a fall in demand for the original product.
Options A, B and D would be expected to lead to an outward
(rightward) rise in the demand curve.
If the price of a complement falls, this will lead to an increase in
demand for it. In turn, this will also be expected to lead to an increase
in demand for products associated with it.
11.12 A The introduction of a government subsidy, and the development of

new technology which makes production quicker and cheaper, will
both be expected to shift a supply curve to the right. A shift to the right
indicates that the supply of the good will be increased at every price.
A rise in the cost of factors of production, or the introduction of an
indirect tax on the good will have the opposite effect – they will cause
the supply curve to shift to the left. So, even though the market price of
the good remains the same, firms will be prepared to supply less of the
good at that price.
11.13 C Q is a factor of production, therefore Q's market is a factor market.

As the supply of Finto increases, there is an increase in demand for
factors of production (like Q). As Q's market was previously in
equilibrium, the increase in demand for Q will cause a shortage of Q
(demand > supply) which in turn will cause the price of Q to rise.
11.14 Supply of Zebops Increase

Price of Zebops Decrease
Because the market for FFF is initially in equilibrium, an increase in the

supply of FFF will lead to a surplus (supply > demand). Consequently,
the price of FFF will fall.
This fall in the price of FFF will lower the costs of production of firms
using FFF to make Zebops. In turn, this will lead to an increase in the
supply of Zebops, such that supply of Zebops now exceeds demand.
The resulting surplus of Zebops will lead to a fall in their price.
11.15 A, E A rightward shift in the supply curve of A1 corresponds to an increase

in the supply of A1, where that increase is due to any factor other than
price of A1.
In this case, a government subsidy for A1 and a reduction in the cost of
the raw materials used to make A1 would both increase supply of A1 at
any price level, because they will make A1 more profitable.
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Increasing the price of A1 will lead to a movement along its supply

curve, not a shift in the supply curve.
Increasing the price of B2 and reducing the cost of producing B2 are
both likely to increase production of B2. However, because A1 and B2
are goods in joint supply, an increase in the production of B2 is likely to
be accompanied by a leftward shift (reduction) in the production of A1,
not a rightward shift.
11.16 B You must distinguish between factors that cause a shift in the supply
curve (a change in the number of people who will offer themselves for
the work at any given wage level) and a movement along the supply
curve (changes in the number of people who will offer themselves for
work in response to changes in the wage level).
A fall in the real wage levels of professional scientists will cause a
movement along the supply curve; fewer people will offer to do the
work as the wages they receive for doing it falls.
By contrast, a reduction in government spending on science education
will mean there are less people who are qualified and able to do the
work (regardless of how much they would be paid).
An increase in salaries being paid for non-science jobs means that
these become relatively more attractive, meaning the number of people
who want to become professional scientists falls.
11.17 B A fall in the cost of producing the good will lead to an increase in
supply at every price, which means the supply curve will shift to the
right.
The conditions of demand have not changed so the demand curve for
the good has not shifted. However, the increased supply will lead to a
lower equilibrium price. A surplus of supply over demand and a lower
price will lead to an increase in demand (to restore the market clearing
equilibrium for the product).
11.18 A A fall in demand for the complement will lead to an inward shift in the
demand for this product. For example, if the demand for beach holidays
falls, this will reduce demand for associated goods (complements) such
as swimwear. In turn, this will cause a surplus of swimwear and its
price will begin to fall.
The imposition of an indirect tax on the product, and rising costs of
production will both lead to an inward shift in the supply curve. This
will lead to a shortage of the product, which in turn will lead to an
increase in the price in order to restore the market equilibrium.
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The health scare is likely to lead to a reduction in demand for the

substitute product, meaning that demand for our product could
increase. This will lead to an outward shift in the demand curve,
resulting in an increase in price, not a fall.
11.19 B A change in attitudes towards a product will lead to a shift in the

demand curve. If the change is a negative one (as in Option 2 here), the
demand curve will shift to the left, indicating that demand for the good
at any given price level is less than before. A fall in consumers' income
will have the same effect (assuming a normal good, not an inferior
good). The fall in income means that consumers' ability to purchase
goods is reduced at each price.
A rise in the price of substitute products will cause the demand curve
to shift to the right, as chocolate becomes relatively cheaper and more
is demanded at each price.
A change in the price of a good itself causes a movement along the
demand curve, not a shift in it.
11.20 C The demand curve shows the relationship between price and demand,
so if price changes then the level of demand moves from one point on
the curve to another.
12 Demand and supply analysis

12.1 B To increase market share requires greater quantities of the firm's
products to be both demanded and supplied. To sell more, a firm needs
to lower price. For this to be profitable, demand must be elastic. To
produce more, supply must also be elastic.
12.2 B (i) is false as an inferior good would have negative income elasticity.
(iii) is false – if price elasticity is less than 1, demand is said to be
inelastic (iv) is also false, as unrelated products has a cross elasticity of
zero.
12.3 (i) A Tax incentives will encourage investment which will increase
output capacity
(ii) C Forbidding takeover will mean more competitors in an industry
and encourages competition
(iii) B Equal opportunities will positively influence employment
(iv) D Product safety standards will ensure a minimum safety level for
consumers
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12.4 B Imposing an indirect tax will increase the price paid by a consumer, but
could reduce the amount received by a supplier (because they receive
the price net of tax).
The total yield from an indirect tax is likely to be greatest when
demand for the good is relatively unaffected by the addition of a tax
onto the price (ie demand is inelastic) and also when supply is
relatively unaffected, even though suppliers will be receiving the price
net of the tax (ie supply is also inelastic).
12.5
If consumers only spend a small proportion of their False
income on a good, demand for that good will be
highly price elastic.
A good for which there are a large number of close True
substitutes will be highly price elastic.
If we only spend a very small proportion of our income on a good, then
a rise in the price of that good will have very little impact on the
amount of it we consume. For example, salt has a very low price
elasticity of demand. We spend a very small proportion of our income
on salt, so even if there was a large percentage increase in the price of
salt we would have relatively little difficulty in paying this, and so
demand for salt would not fall substantially. By contrast, if mortgage
interest rates rise, then demand for mortgages would be expected to
fall substantially, because – given their income constraints – people
will no longer be able to afford a mortgage.
Goods which have a large number of close substitutes will be highly
price elastic, because if the price of the good rises consumers will
simply switch to one of the substitutes rather than paying the higher
price.
12.6 D Price elasticity of supply is calculated as: % change in quantity

supplied / % change in price.
Price has increased by 4% (Rs 2,000/Rs 50,000).
In response to that, quantity supplied has increased by 10%
(400/4,000).
Price elasticity of supply = 10% / 4% = 2.5
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12.7 Supply is likely to be inelastic if firms have lots of False

spare capacity.
Supply is likely to be more elastic in the short run False
than the long run.
Supply is likely to be elastic if a firm has lots of spare capacity, because
the spare capacity means it can quickly and easily increase the amount
it supplies following the price rise.
Supply is likely to become increasingly elastic the longer the time
period being considered. In the immediate aftermath of a price rise,
supply is likely to be almost fixed, or could only increase according to
any inventory of finished goods already available to sell.
In the longer term, existing firms will have time to increase their
production capacity, while new firms may also enter the industry in
response to a price rise making production more profitable.
12.8 A If demand is price inelastic, then demand responds by a less than

proportional amount to a change in price. So, for example, if price rises
by 5%, demand will fall by less than 5%. Consequently, total
expenditure on a good which is inelastic rises if price rises and
decreases if price decreases.
However, although the response is less than proportional, the quantity
demanded will still fall following an increase in price.
The only circumstance in which total expenditure on a good remains
unchanged following a change in the price of the good is if price
elasticity of demand is exactly equal to 1. This is known as unity or unit
elasticity.
12.9 C If the price of a product rises, say mobile phone call rates, some
consumers will conclude that they might spend more changing their
contract and so on that they would save by switching to a cheaper
provider. This reduces price elasticity of demand.
Consumers are more likely to respond to price rises if there are more
substitutes (B) which are similar to the product whose price has risen
(D). Over time, consumers are more likely to become aware of price
rises and to respond to them (A).
12.10 B, C, E
Supply is likely to be elastic if firms have spare capacity or if they can
easily obtain additional supplies of the raw materials or labour
required to make a product. If the price of the product increases, and
therefore becomes more profitable for a firm to make and sell, the firm
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will respond by obtaining the necessary additional resources to

increase the amount it supplies.
Similarly, if a firm has large quantities of a finished product in stock, it
can easily increase the amount of the product it supplies to the market.
A shortage in raw materials will make it harder for the firm to increase
the amount of the product it makes following an increase in the price of
the product. This will mean that the price elasticity of supply for the
product is likely to be low. Similarly, if it is difficult for the firm to
switch resources away from alternative products, this will make it
harder to increase the supply of any given product following an
increase in its price.
12.11 A The number of substitutes for a good, and the proportion of household
income spent on it, are major determinants of a good's price elasticity
of demand.
Goods which have a large number of substitutes are likely to be price
elastic, because if the price of the good rises consumers will be likely to
switch to buying one of the substitutes, rather than paying the higher
price.
The price elasticity of demand for a good increases as the proportion of
household income spent on it increases.
Options 3 and 4 will both lead to a shift in the demand curve but, in
themselves, they will not affect the price elasticity of demand of a good.
12.12 A, D If price elasticity of demand is unitary (ie = 1) then number of units

demanded will fall by the same percentage as price has risen. This
means that total revenue will be unchanged.
Because the number of units demanded falls, the number of units
produced will fall too meaning that costs fall. Since revenue will be
unchanged and costs will fall then profits will rise.
12.13 A The free market price will not change. A minimum price will only affect
supply and demand for a good if it is above the free market price.
Options C and D refer to this scenario (ie where minimum price is set
above free market price).
Option B confused a maximum price with a minimum price; suppliers
would be likely to withdraw from the market if maximum price is set
below the free market price.
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12.14 A Maximum pricing policies (or 'ceiling prices') mean that the maximum
price for which a good can be sold is set below the market price.
As a result, the amount suppliers will be prepared to supply will fall.
The lower price means that consumers will be willing and able to
purchase more of a good. However, because the amount suppliers are
prepared to supply has fallen, there will be a shortage. (This can be the
basis for 'black market' economies.)
Under free market conditions, this shortage will lead to a rise in price
under market equilibrium is restored. However, because the price
cannot go above the prescribed maximum, the equilibrium cannot be
restored here.
Because the amount which customers can actually buy (rather than
how much they might like to buy) has fallen, due to the restrictions in
supply, total expenditure by consumers will fall.
Similarly, the fact that price has been reduced and supply has fallen
means that producers' incomes will fall, not rise.
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PART G: PRODUCTION, COST, PRICE AND OUTPUT DECISIONS
13 Production and cost functions

13.1 A Marginal cost is the addition to total cost of producing one more unit of
output.
13.2 A There are economies of scale in production.
13.3 D Do not confuse the long and short run effects. The long run suffers
diseconomies of scale, but diminishing returns are a short run
phenomenon.
13.4 B Increasing returns make the large firms more competitive, not less
competitive.
13.5 D A and C are correct statements but also apply to curvilinear total cost
curves. B is false, variable costs are not constant.
13.6 C A does not describe the S shape of the curve. B is the wrong way
around, falling efficiency increases variable cost per unit and so makes
the curve steeper. D looks plausible but ignores the fact that total costs
always rise as output rises.
13.7 D Marginal costs are the amount of additional variable cost required to
produce an extra unit of output. Therefore B and C are wrong. If
efficiency improves the marginal cost will fall as shown by the total
cost curve becoming shallower and therefore A is wrong.
13.8 D Option 2 is, in effect, describing economies of scale, which could give
large firms a competitive advantage against smaller firms.
Targeting a specific niche within a market (Option 3) can often be a key
part of a small firm's competitive strategy.
The minimum efficient scale (MES) is the size beyond which no
significant economies of scale can be achieved (because unit costs have
already reached their lowest level). If the MES occurs at a relatively low
level of output, then large firms may not achieve any additional
economies of scale compared to larger firms. Moreover, if the large
firms start to suffer diseconomies of scale (as in Option 4) this actually
leads to their unit costs being higher than those of smaller firms.
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13.9 D Technical improvements could apply at any scale of operations, and so

are not a source of economies of scale.
Specialisation is one of the main sources of economies of scale, either
in relation to efficiency gains from using specialist equipment
(Option A), or through a more structured division of labour (Option C).
Purchasing in bulk can help firms obtain inputs more cheaply, if they
are able to obtain bulk discounts.
13.10 B A firm benefits from economies of scale if increasing the level of output
leads to a lower cost per unit of output. This means that economies of
scale will lead to falling average costs.
The firm stops benefiting from economies of scale at the point at which
its average cost curve becomes horizontal. After this point, average
costs remain constant as output increases, instead of decreasing as
they would do if the firm continued to benefit from economies of scale.
The rising average cost curve in turn signifies the point at which the
firm would start to suffer from diseconomies of scale.
13.11 B A variable cost is one which varies with the amount of output being
produced.
The amount of raw materials required will increase as the amount of
output being produced increases. Therefore the cost of raw materials is
a variable cost.
The interest paid on a variable rate mortgage will vary if interest rates
change, but this is not related to the level of output, therefore this
should not be classified as a variable cost.
Similarly, the rental paid to lease the warehouse does not vary with the
level of output. Therefore, even if the landlord increases the rent, this
would still be classified as a fixed cost.
Similarly, the amount of depreciation charged on the machine is a fixed
cost.
13.12 A, B, D
Internal economies of scale occur when a firm expands its output and
as a result its average costs per unit fall.
The distinction between internal and external economies of scale is
that internal economies result from the size of the individual firm,
whereas external economies arise when an industry as a whole grows.
External economies of scale can benefit all the firms in an industry,
rather than being restricted to a single firm.
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The availability of labour with specific skills and marketing firms which
specialise in the industry are both factors which relate to the industry
as a whole, and so they are external economies of scale.
Although financial economies of scale (such as Option D) don't relate
directly to the firm's operation and production, they are still internal
economies of scale because the lower interest rate is a function of the
firm's own size, rather than being a function of the industry's size.
13.13 The firm's average costs will decrease as its level of False
production increases.
The firm should increase its level of production in False
order to increase efficiency. increase the transaction
costs.
Diseconomies of scale mean that costs per unit of output (ie average
costs) increase as the scale of production increases. Consequently, the
firm should reduce (rather than increase) its level of production in
order to reduce costs and increase profitability.
14 Profit maximisation
14.1 A The supply curve for a perfectly competitive firm is its marginal cost
curve above the average variable cost curve. The firm will not continue
to produce if price is less than average variable cost.
14.2 C A is one of the conditions for a perfect market, B is a monopoly and D is

monopolistic competition.
14.3 C This is an example of monopolistic competition.
14.4 B The minimum efficient scale (MES) is the lowest level of output at
which a firm can achieve minimum average cost. We would expect the
firm with the highest market concentration to be the one in which the
MES constitutes the highest proportion of total industry sales. The
higher the MES as a proportion of total industry sales, the lower the
number of firms in that industry which can operate at their minimum
average cost.
Industry A: MES is 1/7 of total sales, suggesting that up to 7 firms could
operate in the industry and all achieve their minimum average costs.
Industry B: MES is 1/4 of total sales, suggesting that a maximum of
4 firms could operate in the industry and still minimise their average
costs.
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In Industry C, MES is 1/6 of total sales; while in Industry D MES is 1/5

of total sales.
As such, we would expect the highest level of market concentration in
Industry B.
14.5 B The key differentiators here are the homogenous product and the small
number of competing companies.
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PART H: MACROECONOMIC ENVIRONMENT AND BUSINESS
15 Macroeconomic forces and business decisions

15.1 A Frictional unemployment occurs when there is difficulty in matching
workers quickly with jobs. This means that frictional unemployment is
temporary and short term and so statement 1 is true. A government
can encourage labour mobility by offering individuals financial
assistance with relocation expenses and by improving the flow of
information on vacancies. This means that statement 2 is true.
15.2 D Investment is an injection into the circular flow of income in an

economy, and therefore will be expected to increase aggregate
demand.
Saving, imports and taxation are all withdrawals, and so will reduce
(rather than increase) aggregate demand.
15.3 D The increased level of spending on imports leads to a reduction in

spending on domestically produced goods (consumption of
domestically produced goods). Consumption is one of the elements of
aggregate demand, so this change will lead to a reduction in aggregate
demand.
Spending on imports is a withdrawal from the circular flow. So
increasing the level of imports will lead to a fall in national income.
15.4 C A recession is a period in which there is negative economic growth (ie

national income declines).
During a recession, the level of aggregate demand will be too low
relative to aggregate supply. As a result, firms are likely to reduce the
amount they produce, with the result that they need a smaller labour
force. This leads to increases in the level of unemployment.
Some of the other key characteristics of economic recession are:
 Low business confidence, investment spending and reduced
business profits
 Low household income and widespread drop in consumer
spending (this means statement A cannot be correct)
 Falling inflation rate (this means statement B cannot be correct)
Reductions in investment spending and consumer spending both
contribute to the low levels of aggregate demand (and mean that
statement D is not correct).
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15.5 B Increasing public sector expenditure provides an injection into the

circular flow and so should increase the level of aggregate demand in
the economy, particularly if the impact of the initial injection is then
boosted by the multiplier effect. As such, increasing public sector
expenditure is a key component of a demand management policy.
Lowering interest rates should stimulate investment (by companies)
and consumer expenditure – which again will help to boost aggregate
demand.
Increasing taxation lowers demand in the economy because people will
have less money available (after tax) for consumption. Similarly,
increasing taxation could also mean that firms have less money
available for investment.
15.6 The rate of unemployment is likely to be higher in False

Effland than Geeland.
The rate of inflation is likely to be higher in Effland True
than Geeland.
The level of imports into Effland is likely to be higher True
than into Geeland.
Effland is experiencing a boom, and therefore we would expect the rate
of unemployment to be low, whereas Geeland (which is suffering a
recession) would be expected to have a higher rate of unemployment.
In a boom period, we would expect inflation to be relatively high, due
to the high levels of aggregate demand compared to aggregate supply.
In turn, these high levels of aggregate demand for goods and services
would also be expected to lead to high levels of imports into Effland
(because the imports will be necessary to satisfy the high levels of
demand).
15.7 C The starting point does not matter, but a depression follows a
recession, and a boom follows a recovery.
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Answers
15.8 C Lowering interest rates is a monetary policy designed to encourage

more spending in the economy, thereby helping to reduce cyclical
(demand-deficient) unemployment.
Making more training available for the unemployed is a supply side
policy, and so will be less useful in reducing unemployment in this case,
since the unemployment results from a lack of demand for labour
rather than skill shortages amongst the workforce.
Increasing the exchange rate will make imports cheaper and exports
more expensive. This could be expected to increase demand for
imports into Ipland and reduce demand for exports from Ipland which
would reduce aggregate demand overall, rather than increasing it.
16 Inflation
16.1 A Debts lose 'real' value with inflation: a company that owes a lot of
money would effectively pay less (in real terms) over time.
16.2 D Cost-push inflation is inflation caused by higher unit costs of

production being passed through into higher prices.
Increases in wages are one of the main causes of cost-push inflation,
and aggressive wage demands made by trade unions on behalf of their
members could contribute to this wage inflation. Weakening the power
of trade unions could therefore be one way of reducing the size of
wages increases.
A revaluation of the currency (measure 4) will make imported goods
and raw materials cheaper for firms in Country X to buy. This could be
particularly important in Country X, since imported goods are likely to
make up a significant proportion of firms' production costs.
Introducing a sales tax on manufactured products would lead to an
inward shift in the supply curve for those products and so would be
expected to increase cost-push inflation rather than decreasing it.
Similarly, a decision by oil producers to restrict supply would be
expected to increase the price of oil, which in turn will have a knock-on
effect on the price of other goods. Again, this will increase cost-push
inflation rather than decreasing it.
CA Sri Lanka 111

16.3 B, C Measures which can help to reduce the level of demand-pull inflation
will be ones which reduce the level of aggregate demand in an
economy.
Increasing direct taxes (taxes on income) will reduce the amount of
disposable income households have available for buying goods and
services – thereby reducing aggregate demand.
Making controls over bank lending more stringent will reduce the
amount of money banks lend. If there is less credit available to
consumers, this will in turn reduce the value of goods they can buy.
Options A, D and E could all be used as measures to try to stimulate an
economy rather than to keep aggregate demand in check. Lowering
interest rates (Option A) would be expected to result in an increase in
investment and other consumer borrowing, leading to even stronger
demand-pull inflation. Increasing the money supply (Option E) will
also lead to a fall in interest rates.
Increasing government expenditure and/or reducing taxes (Option D)
will also provide an additional injection into the economy, thereby
boosting aggregate demand rather than reducing it.
17 Exchange rates in competitive markets

17.1 C A budget surplus occurs when a government's income exceeds its
expenditure: there is a negative PSNCR or PSDR. When a government's
expenditure exceeds its income, so that it must borrow to make up the
difference, there is a positive PSNCR and we say that the government is
running a budget deficit.
Ways in: If you recognised that a negative PSNC means no borrowing,
you might have been able to start eliminating some options…
17.2 D An increase in the exchange rate makes a country's exports more

expensive to overseas buyers, and imports cheaper: it therefore has the
opposite of the first three effects. The lower cost of imports, however,
is likely to reduce the rate of domestic inflation.
17.3 B Subsidies for exporters will encourage domestic exports, but will not
help to protect domestic producers against overseas producers. The
other options are tariff (taxes and duties on goods entering the
country) and non-tariff barriers to trade.
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Answers
17.4 B An expansionary fiscal policy will stimulate aggregate demand in the

country and lead to higher purchases of imports. (Option D would be
expected to have the opposite effect.)
A devaluation (Option A) will make imports more expensive (reducing
demand for imports) and exports cheaper (increasing demand for
exports). This should help to reduce a deficit on the balance of
payments current account, rather than to make it worse.
Subsidies (Option C) should help to increase the supply of domestic
goods, and to lower their price, meaning that consumers buy more
domestically produced goods rather than imported ones.
17.5 A marked deterioration in the UK's balance of trade False

will lead to an increase in the value of £ sterling.
A deterioration in the balance of trade will lead to a False

reduction in demand for foreign currency to pay for
imports.
A marked deterioration in the UK's balance of trade means there has

been a significant increase in the value of imports relative to exports.
This means that demand for foreign currency will increase relative to
demand for sterling, because foreign currency will be needed to pay for
the imports. This will lead to a decrease (rather than an increase) in
the value of sterling.
17.6 A In a floating exchange rate, the rate is determined by the market forces
of demand and supply for a given currency.
For example, if the UK's demand for imports falls, then the supply of
the UK currency (£) will fall (so the price of £ will rise).
Conversely, a rise in foreign investment into a country increases
demand for that country's currency – which again will lead to the price
of that currency (the exchange rate) appreciating.
A fall in a country's interest rates (Option 3) will be expected to
reduce the demand for that country's currency due to the low returns
that investors can gain from depositing money in the country.
Reduction in demand for the currency will reduce the exchange rate
(depreciation).
CA Sri Lanka 113

17.7 B The movement in the exchange rate signifies that the US dollar has
appreciated against the yen. This means that the price of Japanese
imports, when translated into dollars, becomes cheaper.
Demand for Japanese imports is price elastic, therefore the fall in price
will lead to a greater than proportional increase in demand, meaning
that – overall – expenditure on Japanese imports will increase.
17.8 B The fall in the rate of inflation in Exland relative to the inflation rates in
Exland's major trading partners will make Exland's exports more
attractive, because the price of goods from Exland will be rising less
quickly than goods from other countries. Demand for Exland's
currency will rise because foreign customers will need the currency to
pay for the exports. (This is likely to cause an increase in the supply of
the currencies of Exland's trading partners, not a decrease.)
An increase in Exland's interest rate could help to explain why the rate
of inflation has fallen (if it helps to control excess aggregate demand)
but a fall in the rate of inflation would not be expected to lead to a rise
in interest rates.
17.9 A A decision to reduce interest rates will normally be made in order to

try to boost aggregate demand in a country. Lower interest rates will
be expected to lead to an increase in consumer spending (Option 1)
and lower interest expenses for business – a combination which
usually means higher profits for businesses (Option 2).
However, lower interest rates will be expected to reduce the value of a
currency relative to other currencies, leading to higher import costs.
17.10 C The balance of payments (BoP) current account records inflows and
outflows of funds into / out of a given economy, due to international
trade of goods and services. If inflows exceed outflows, the account will
be in surplus. It will be in deficit if there is a net outflow.
Foreign tourism is effectively an export for a country, so an increase in
foreign tourism into a country (Option C) will result in inflows of funds.
An increase in the volume of imports (Option A) will typically lead the
BoP current account towards a deficit, rather than a surplus.
Capital transactions between a given country and the rest of the world
(Option B) are recorded in the BoP financial account, not the BoP
current account.
The level of government tax receipts compared to the level of
government spending determines whether there is a budget deficit or
surplus within a country. However, this is an internal deficit or surplus,
rather than part of the balance of payments.
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Answers
Increasing the tax rate (in the context of contractionary fiscal policy)
might help to reduce imports as the level of aggregate demand in a
country falls. However, Option D only tells us that total tax receipts
have increased, not that the tax rate has increased. For example, total
tax receipts might have increased due to economic growth in the
country, and this could lead to increased demand for imports.
17.11 D A deterioration in the balance of payments current account could be

caused by a reduction in exports, an increase in imports or a
combination of both.
Reason 1. High levels of domestic inflation (particularly cost-push
inflation) will mean that the price of goods produced in Country D
increases more quickly than goods produced in other countries. This
means Country D's goods become less competitive on the international
market, and so will reduce the demand for them (ie Country D's
exports fall).
Reason 2. The high price of domestically produced goods within
Country D could increase demand for (substitute) imported goods,
which will increase the volume of imports.
Reason 3. If inflation is caused by the level of aggregate demand in
Country D (ie demand-pull inflation) domestic firms will not have
sufficient capacity to produce goods for an export market as well as
meeting domestic demand. In effect, the high levels of domestic
demand mean that output has been 'diverted' from export markets to
domestic markets, so the level of exports will fall.
17.12 Quantity of exports from Country B to its trading Decrease

partners
Quantity of imports into Country B from its trading Increase
partners
Balance of payments current account deficit Increase
Exports: Currently, firms in Country B have spare capacity, and they
can use this to produce goods and services to export. However, as
domestic demand increases (as a result of the faster economic growth)
firms will have less capacity available for exports, so the quantity of
exports will fall.
Imports: Conversely, aggregate demand in Country B will increase as
the economy grows, and this increased demand will include increased
demand for imported goods as well as domestically produced goods.
Therefore the quantity of imports into Country B will increase.
CA Sri Lanka 115

Balance of payments: A decrease in exports coupled with an increase in

imports will lead to the existing deficit on the current account deficit
becoming bigger.
17.13 A contractionary fiscal policy in Country DDD Appreciation

causing a reduction in the level of consumer
spending in Country DDD
A reduction in the rate of inflation in Country DDD Appreciation
making exports from Country DDD more
competitive in foreign countries
A reduction in the overall level of consumer spending in Country DDD
will reduce the level of imports, because the reduction in spending will
affect demand for imported goods in the same way as it would affect
demand for domestically produced goods. The supply of Country DDD's
currency coming on to the foreign exchange market will decrease as a
result, meaning that there will be a shortage of DDD's currency which
will lead to an appreciation in the exchange rate in order to restore
equilibrium between supply and demand.
If Country DDD's exports become more competitive, demand for
exports will increase, which in turn would be expected to increase the
demand for Country DDD's currency. If demand for a currency exceeds
supply then there will be an appreciation in its exchange rate in order
to restore equilibrium.
17.14 The price, in Rs LKR, of imported goods Increase

Total spending by Sri Lanka on imported goods Decrease
With a depreciation in the value of Rs LKR, import prices rise.
Since demand for imports is elastic, the rise in the Sri Lanka price of
imported goods will lead to a greater than proportional fall in demand
for imports. Therefore total spending on imports will fall.
17.15 A, C, F
The underlying aim of protectionism is for a country to protect its own
companies from international competition.
One way to do this is to reduce the threat from imported goods and
services: for example by imposing a tariff on imported goods (which
increases their price and therefore makes them less competitive), or by
imposing import quotas which limit the quantities of imports.
An alternative way of protecting local firms is by subsidising them,
thereby lowering the price of their goods and services, and making
them more competitive in relation to imported products.
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Answers
17.16 Demand in Country M for steel from Country X Decrease

Expenditure in Country M on steel imported from Increase
Country X
Total revenue in Country X from steel exported to Decrease
Country M
Imposing a tariff on steel being imported into Country M will increase
the price of this steel for consumers in Country M. Consequently,
demand for imported steel will decline. However, because demand for
steel is price inelastic, the fall in decline will be less than proportional
to the increase in price, so total expenditure on the steel will increase.
However, although the price has increased, the amount received by
producers in Country X does not increase because the tariff amount has
to be paid to the Government of Country M. Consequently, the fall in
demand for the steel (following the imposition of the tariff) will lead to
a decline in the steel producers' revenue.
17.17 D In a recession, firms have the opportunity to export to more

prosperous markets which should reduce the impact of the trade
cycle's recession phase.
Notes on incorrect answers:
Countries can specialise in products or services in which they have a
natural advantage and use the revenue from trade to purchase
imported goods and services.
It may lead to the purchase of dangerous or unethical imported
products (ivory for example).
The creation of external economies of scale is likely because
international trade increase the potential size of the market and
therefore will stimulate cost savings that result from an increase in the
market size.
CA Sri Lanka 117

18 Monetary and fiscal policy

18.1 D Exchange rates are a target of monetary policy: government policy on
the money supply, the monetary system interest rates, exchange rates
and the availability of credit. Fiscal policy is government policy on the
three other options.
18.2 C Indirect taxes are collected by the Revenue authority from a business,
which attempts to pass on the tax to consumers in the price of goods.
This definition clearly distinguishes an indirect tax (eg sales tax) from a
direct tax, which is paid directly by a person to the Revenue authority
(eg income tax, corporation tax, capital gains tax and inheritance tax).
Option A refers to the proportion of income taken by a tax.
18.3 C Increasing taxation lowers demand in the economy because people have
less of their own money after tax for consumption or saving/investment.
Decreasing taxation has the opposite effect. Increasing public
expenditure should increase the level of consumer demand. Lowering
interest rates should stimulate investment (by companies) and consumer
expenditure, even if only after a time lag.
18.4 A Government policy on taxation, public spending and public borrowing

relates to fiscal policy. Government policy on interest rates and
exchange rates are part of the monetary policy.
18.5 D If the supply of money is increased, then the price of money – in effect,
interest rates – will be reduced. Lower interest rates mean the cost of
capital used in investment decisions will also be reduced, meaning that
the net present value of investment projects will increase. This will
lead to an increase in investment spending. Investments represent an
injection into the economy, so a growth in investments will lead to an
increase in aggregate demand.
Similarly, a fall in interest rates may make saving relatively less
attractive. Saving is a withdrawal from the circular flow, so reducing
the amount of saving could also be expected to lead to an increase in
aggregate demand.
18.6 A The Government's intention to use a deflationary fiscal policy means

that it wants to reduce inflation by reducing the level of aggregate
demand in the economy. Taxes are a withdrawal from the circular flow
of income, so increasing taxes will help to reduce the level of aggregate
demand.
The budget deficit represents the excess of the Government's spending
over its tax receipts. Government spending is an injection into the
circular flow, but in this case, the Government is looking to reduce
aggregate demand, not to increase it. Therefore in this scenario, the
118 CA Sri Lanka

Answers
Government will be looking to reduce a budget deficit, not to

increase it.
An interest rate rise is a potential measure which could be used to
reduce the level of aggregate demand in an economy, but interest rate
rises are an aspect of monetary policy, not fiscal policy.
18.7 B, C Fiscal policy looks at levels of government expenditure and how they
can be funded through tax revenues. An expansionary fiscal policy is
one designed to promote growth in the economy, which could be
achieved through reductions in taxation and/or increases in
government spending (Option C).
Increases in tax allowances (Option B) will have the same effect as a
reduction in tax, and they would be used to encourage increased
investment in capital equipment. Investment is an injection into the
circular flow.
Although Option A relates to fiscal policy, increasing tax rates would be
expected to reduce aggregate demand, rather than to increase it.
Options D and E relate to monetary policy, rather than fiscal policy.
Therefore, reducing interest rates could be a mechanism for promoting
growth in an economy; we would not expect to see a reduction in
interest rates specifically as a result of the Government's policy.
18.8
The level of investment Bizzi Co makes in new True
capital equipment will be expected to fall
The level of consumer demand for Bizzi Co's True
products will be expected to fall.
Interest rates are, in effect, the price of capital. Therefore, a rise in
interest rates represents a rise in the price of capital, which will mean
that the level of investment would be expected to decrease.
Similarly, higher interest rates will typically cause a fall in consumer
demand – particularly for relatively expensive goods such as Bizzi's,
which consumers may buy on credit rather than paying for them in
cash. (In turn, the reduced demand for Bizzi's products may further
reduce the level of investment it makes.)
CA Sri Lanka 119

18.9 C Supply side policy aims to increase the long-term productive capacity
of an economy. This is based on the macroeconomic argument that
economic growth can be most effectively created by lowering barriers
for people to produce (supply) goods and services, such as lowering
income tax and capital gains tax rates, and by allowing greater
flexibility by reducing regulation. As a result, consumers will benefit
from a greater supply of goods and services at lower prices.
A policy concerned with managing the money supply in an economy
(Option B) is a monetary policy rather than a supply side policy.
Although the labour supply (Option D) is likely to be a key element of a
supply side policy, the focus of the policy will typically be on increasing
the supply of labour, not reducing it.
18.10 C Monetary policy includes policies on interest rates and exchange rates
while fiscal policy includes policies on public borrowing and public
spending.
18.11 B Increased taxation but no increase in spending represents a

contractionary fiscal stance.
18.12 C Increasing taxation lowers demand in the economy because people

have less of their own money after tax for consumption or
saving/investment. Increasing public expenditure should increase the
level of consumer demand. Decreasing taxation has the opposite effect.
Lowering interest rates should stimulate investment (by companies)
and consumer expenditure, even if only after a time lag.
Control of the money supply Monetary policy
Interest rates Monetary policy
Government spending Fiscal policy
Exchange rates Monetary policy
Government borrowing Fiscal policy
Fiscal policy refers to the use of taxation and government spending in

order to manage the economy and achieve the government's economic
objectives. Monetary policy attempts to achieve the same end but does
it through the control of the money supply in the economy.
120 CA Sri Lanka

122 CA Sri Lanka

Mock Exam Questions
All fifty questions are compulsory.
1 The directors of a company want to increase the prices for all of their
products, following a rise in the cost of key raw materials used in the
manufacture of the products.
Which of the following stakeholder groups is most likely to object to this
change?
A Employees
B Shareholders
C Customers
D Suppliers
(LO 1.2.2) (2 marks)
2 systems record and store the knowledge held

within an organisation.
Which word or phrase correctly completes this sentence?
A Knowledge Support
B Expert Support
C Executive Support
D Decision Support
(LO 4.4.1) (2 marks)
3 Which of the following government policy tools relate to monetary policy?

A Borrowing
B Taxation
C Interest rates
D Government spending
(LO 8.4.1) (2 marks)
4 In recent years, a number of skilled workers have left Country Z to work in

neighbouring countries, because the tax rates in the neighbouring countries
are lower than Z's. The resulting decrease in the supply of skilled labour in
Country Z is likely to lead to:
A A lower equilibrium wage and a lower quantity of labour employed
B Structural unemployment
C A higher equilibrium wage and a lower quantity of labour employed
D Frictional unemployment
(LO 8.1.1) (2 marks)
CA Sri Lanka 123

5 Which of the following is NOT one of Fayol's five functions of management?

A Planning
B Organising
C Motivating
D Commanding
(LO 2.2.3) (2 marks)
6 Henry Mintzberg categorised five basic components of an organisation.

Which TWO the following statements describes the work of the
technostructure of an organisation?
(i) Designing systems
(ii) Organising and controlling work
(iii) Standardising work
(iv) Securing inputs
A (i) and (ii)
B (i) and (iii)
C (ii) and (iii)
D (iii) and (iv)
(LO 3.2.2) (2 marks)
7 Undifferentiated market positioning involves the targeting of:

A A single market segment with a single marketing mix
B A single market segment ignoring the concept of the marketing mix
C An entire market with a different marketing mix for each segment
D An entire market with a single marketing mix
(LO 4.2.4) (2 marks)
8 When a price floor is imposed above the market equilibrium level:

A A shortage will result
B A surplus will result
C Scarcity will result
D The good is no longer scarce
(LO 7.2.3) (2 marks)
124 CA Sri Lanka

Mock Exam Questions
9 ADB is a business which is owned by its workers. The workers share the
profits and they each have a vote on how the business is run.
Which TWO of the following best describe ADB?
A Public sector
B Private sector
C Not-for-profit
D Co-operative
(LO 1.1.1) (2 marks)
10 What one of the following is the best definition of corporate governance?

A A situation where management acts as agents for shareholders
B The laws of a country that govern the companies within it
C The systems by which organisations are directed and controlled
D A market where a small number of dominant firms control prices and
quantities
(LO 3.4.1) (2 marks)
11 Being 'straightforward and honest in all business and professional

relationships' refers to which of the fundamental principles?
A Professional competence and due care
B Integrity
C Objectivity
D Professional behaviour
(LO 1.1.6) (2 marks)
12 A legal minimum price is set which is below the equilibrium price. What will
be the impact of this?
A Excess of demand over supply
B Excess of supply over demand
C An increase in price
D Nothing
(LO 7.2.3) (2 marks)
CA Sri Lanka 125

13 Sharp frosts in Brazil sent coffee prices soaring to an eight year high as fears
were raised that the coffee harvest would be damaged. Brazil accounts for a
quarter of the world coffee production. Other major producers in Africa and
Central America were frost free. How will this impact on the demand for tea?
A Demand for tea will increase
B Demand for tea will decrease
C Demand for tea will be unchanged
D There is not enough information to answer the question
(LO 6.1.2, 6.1.3, 6.1.4) (2 marks)
14 Which of the following statements are true of monopolistic competition?
(i) The market consists of several large firms
(ii) Firms collaborate with others in the industry
(iii) There is free entry and exit from the industry in the long run
A (i) and (iii)
B (ii) only
C (iii) only
(LO 7.2.1) (2 marks)
15 Which of the following is an example of cyclical unemployment?
A The entry of school leavers into the labour pool each year
B Lay-offs among agricultural labourers in winter
C Automation of ticketing services in tourism
D Recession in the building industry
(LO 8.1.5) (2 marks)
16 Which one of the following is an advantage of centralisation?
A It helps to develop the skills of junior managers
B It avoids overburdening top managers in terms of workload and stress
C Senior managers can take a wider view of problems and consequences
D Smaller, more flexible units can be created within the overall structure
(LO 3.2.2) (2 marks)
17 What is the purpose of management information?
A Planning only
B Planning and control only
C Planning, control and decision-making only
D Planning, control, decision-making and research and development
(LO 3.1.6) (2 marks)
126 CA Sri Lanka

Mock Exam Questions
18 Managers in a public sector organisation act on behalf of which of the

following?
A Shareholders
B Trustees
C Government
D General public
(LO 2.1.1) (2 marks)
19 An organisation is planning to open a new factory located by a river. It is

expected that pollution to the river will increase as a result. Using
Mendelow's matrix, which of the following would be the appropriate course
of action to manage a wildlife conservation group that are protesting against
the proposed factory?
A Keep satisfied
B Keep informed
C Ensure strategy is at least acceptable to them
D Expend minimal effort
(LO 1.2.2) (2 marks)
20 Identify whether the following measures are associated with economy,
efficiency or effectiveness.
Wastage per unit of output 
Productivity per person per hour 
Product quality 
Drop down list:

Economy
Efficiency
Effectiveness
Required
down list.
(LO 2.1.3) (2 marks)
21 Which of the following is NOT an element of marketing management?

A Anticipation of customer requirements
B Supply of products to customers
C Setting prices for services
D Selling products to customers
(LO 4.2.1) (2 marks)
CA Sri Lanka 127

22 Which of the following is true of costs in the long term?

A Bottlenecks will emerge
B Total costs per unit will fall
C No costs are fixed
D Variable costs per unit will rise
(LO 7.1.6) (2 marks)
23 An expert system describes:

A A database built upon past knowledge and experience
B A powerful off the shelf software solution
C An on-line library of operating advice and handy hints
D An electronic version of working papers assembled by the Research
and Development department
(LO 4.4.1) (2 marks)
24 In the diagram shown below, point X represents equilibrium. Two things

now happen:
(i) A technological innovation in production equipment reduces the
average unit cost of manufacturing the commodity.
(ii) Household incomes increase in real terms.
Identify the point on the diagram which will represent the new equilibrium
following these changes.
P S1
S0
A S2
C
X B
D
D1
D0
D2
Q/t
A Point A
B Point B
C Point C
D Point D
(LO 6.1.2, 6.1.3, 6.1.4) (2 marks)
128 CA Sri Lanka

Mock Exam Questions
The following information relates to Questions 25–27.

House prices in Erewhon increased rapidly between 20X1 and 20X6, but then fell
in 20X7–9.
25 From the three options in the list below, identify the relationship between
supply and demand for houses in each of the two periods: 20X1–6, and
20X7–9.
Year Relationship between supply and demand
20X1–20X6 
20X7–20X9 
Drop down list:

Supply > Demand
Supply < Demand
Supply = Demand
Required
down list.
(LO 6.1.2, 6.1.3) (2 marks)
26 The number of new houses being built in 20X7–9 was one of the major
factors which affected price.
Which of the following determinants of supply best explain the fall in house
prices between 20X7 and 20X9?
(i) A reduction in the number of firms building houses
(ii) Lower raw material costs and labour costs
(iii) Government subsidies to encourage house building
A (ii) only
B (i) and (ii)
C (i) and (iii)
D (ii) and (iii)
(LO 6.1.3) (2 marks)
27 Indicate whether the following factors caused a shift in the demand curve or
a shift in the supply curve for houses in Erewhon between 20X1 and 20X6:
Increasing household incomes 
Reduction in the cost of mortgages 
Shortages of available land 
CA Sri Lanka 129

Drop down list:

Shift in demand
Shift in supply
Required
down list.
(LO 6.1.2, 6.1.3) (2 marks)
28 A firm's product has a price elasticity of demand of −2.
A 10% fall in the price of the product will cause which of the following?
A Sales volume will increase by 20%
B Total revenue will decrease by 20%.
C Sales volume will increase by 5%.
D Total revenue will increase by 20%.
(LO 6.2.1) (2 marks)
29 The scale of production can lead to economies of scale and diseconomies of
scale. These can be internal or external.
From the list below, identify which category of economies or diseconomies
of scale the following four statements relate to.
As a firm has grown, workers have been able to specialise 
in a particular job and become increasingly efficient at that
job.
As an industry has expanded, there has become an 
increasing shortage of skilled labour.
As an industry has developed, banks have developed a 
better understanding of the industry's requirements.
Management have experienced problems of co-ordination 
as the number of divisions in a firm has increased.
Drop down list:
Internal economy of scale
External economy of scale
Internal diseconomy of scale
External diseconomy of scale
Required
down list.
(LO 7.1.4) (2 marks)
130 CA Sri Lanka

Mock Exam Questions
30 The trade cycle is typically categorised into four stages: recession,

depression, recovery and boom.
Identify which of the four stages the following characteristics relate to.
Low levels of aggregate demand mean the equilibrium 

level of national income is below the level needed to
achieve full employment.
Modest rates of economic growth. Improving consumer 
and business confidence, leading to greater expenditure.
Falling levels of business and consumer confidence. Falling 
levels of production. Rising levels of unemployment.
Low levels of unemployment. High inflation due to excess 
demand for labour and other resources. Increasing deficit
in balance of trade.
Drop down list:

Boom
Depression
Recession
Recovery
Required
down list.
(LO 8.1.4) (2 marks)
31 The central bank of Bosland implements monetary policy in the country on

behalf of the Government. The bank has adopted a policy of inflation
targeting to help control inflation levels in the country.
Currently, the rate of inflation in Bosland is above the target level, as a result
of the high levels of aggregate demand in the country.
Which of the following is most likely to happen as a result of this?
A The bank will raise interest rates.
B The bank will increase the money supply.
C The budget deficit will increase.
D Unemployment will fall.
(LO 8.4.1) (2 marks)
CA Sri Lanka 131

32 Which of the following statements are valid criticisms which could reduce
the effectiveness of fiscal policy in managing aggregate demand in an
economy?
(i) Government expenditure may replace private expenditure rather than
providing additional expenditure.
(ii) Increased government borrowing, required to fund additional
expenditure, could lead to higher interest rates.
(iii) Fiscal policy is slower to implement than monetary policy.
A (i) and (ii) only
(LO 8.4.2) (2 marks)
33 The country of Norland has enjoyed significant economic growth in recent

years. However, recently, the rate of inflation has started to increase and the
Government has responded to this by raising interest rates.
In response to the high levels of consumer demand for its product in recent
years, Z Co moved to larger premises. The company used loan funding from
its bank to acquire the premises and to install new equipment in it.
What impact will the Government's interest rate policy be most likely to
have on Z Co's sales and pre-tax profit margin?
A Sales will decrease; net profit margin will decrease
B Sales will decrease; net profit margin will increase
C Sales will increase; net profit margin will decrease
D Sales will increase; net profit margin will increase
(LO 8.4.1) (2 marks)
34 Which TWO of the following government actions are part of its fiscal policy?
A Decreasing interest rates in order to stimulate private sector
investment
B Using official foreign currency reserves to buy the domestic currency
C Borrowing money from the capital markets and spending it on capital
goods
D Reducing indirect taxation while maintaining public spending
(LO 8.4.1) (2 marks)
132 CA Sri Lanka

Mock Exam Questions
35 An accountant has been asked to use the PESTEL framework to analyse the
opportunities and threats facing a company.
Which FOUR of the following should the accountant include in their analysis?
A A newly elected government intends to increase tariffs on imports
B Rising production costs have led to a fall in the company's profit
margin
C Interest rates are expected to increase soon
D Changes in tastes and trends are increasing demand for a product
E The company's highly skilled workforce means the quality of its
products is superior to competitors' products
F New technologies have led to the development of substitute products
(LO 1.1.8, 8.1.1) (2 marks)
36 Borneo plc has increased sales revenue by 8% in each of the last few years. A
stated objective of Borneo plc is now to increase sales volume by 10%.
Which key characteristic of quantitative operational goals does Borneo's
objective lack?
A Specific
B Measurable
C Achievable
D Time-bound
(LO 3.1.9) (2 marks)
37 Which of the following is a correct definition of 'span of control'?
A The number of employees subordinate in the hierarchy to a given
manager
B The number of levels in the hierarchy 'below' a given manager's
C The length of time between a manager's decision and the evaluation of
it by his superior
D The number of employees directly responsible to a manager
(LO 3.2.4) (2 marks)
38 Which of the following is NOT used by Mintzberg in his description of
organisational structure?
A Strategic apex
B Divisional structure
C Technostructure
D Operating core
(LO 3.2.3) (2 marks)
CA Sri Lanka 133

39 Prathik is an HR specialist within Yelland plc. He is responsible for a new

payroll database that will be used by all functions in the company.
If Kanuki, a production manager who is not a member of the Project team
responsible for the databased, attempted to alter database parameters
Prathik could prevent her from doing so by exercising which of the
following?
A Project authority
B Functional authority
C Staff authority
D Line authority
(LO 3.2.5) (2 marks)
40 Are the following statements about the impact on organisations of

technological developments true or false?
Select true or false for each of the following statements
Technological developments have supported corporate 

delayering
Technology developments tend to adversely affect 
employee relations
Technology developments create risk for long-rang 
product/market planning
Technology developments offer significant disadvantages 
for corporate communications
Drop down list:

True
False
Required
down list.
(LO 3.4.4) (2 marks)
134 CA Sri Lanka

Mock Exam Questions
41 The division of the market into homogeneous groups of potential customers

who may be treated similarly for marketing purposes is known as?
A Market mixing
B Promotion
C Segmentation
D Demographics
(LO 4.2.4) (2 marks)
42 Kehan is a senior manager with Barviss plc. His leadership style is one in
which he pays great attention to the task in hand. He is valued by his
superiors for the profit performance of his unit but the staff who work for
him feel he treats them like machines.
In terms of the Blake & Mouton Managerial Grid, Kehan would be classified
as:
A Authoritarian
B Country club
C Participative
D Impoverished
(LO 3.3.4) (2 marks)
43 Randul is a senior manager with Vivra plc. He works in the finance function
of the company, but has no formal qualifications in finance. He is highly
influential within the finance function with both subordinates and also with
managers who are more senior to himself. This is because of his ability to
motivate and persuade those around him with his personality and general
intellectual abilities. Randul exhibits which type of power within Vivra plc?
A Referent power
B Expert power
C Legitimate power
D Coercive power
(LO 3.3.3) (2 marks)
CA Sri Lanka 135

44 Jester plc sees its main purpose as being to sell more of its core Jest product
as it has plenty in inventory. To do so it makes full use of selling, pricing,
promotion and distribution skills, but its department which systematically
identified customer needs and helped design new versions of the Jest to
satisfy those needs was closed down last year and has not been revived.
From this information it is clear that Jester plc has a:
A Sales orientation
B Product orientation
C Market orientation
D Marketing orientation
(LO 4.2.4) (2 marks)
45 Are following are classified as hygiene or motivator factors by Herzberg?

Select true or false for each of the following statements
A A sense of challenge in a job 

B Working conditions of a job 
C Relationships with other staff 
D Recognition 
Drop down list:

Hygiene
Motivator
Required
down list.
(LO 3.3.7) (2 marks)
136 CA Sri Lanka

Mock Exam Questions
46 Spitzbergen plc is constantly looking to decentralise as many aspects of its

activities as it can. However, it is facing difficulties in achieving the required
level of decentralisation with regard to the company's finance function.
Are the following characteristics of the company and its finance function are
likely to have created difficulties in achieving decentralisation?
Select 'yes' or 'no' for each of the statements below.
Yes No
A Homogenous financial requirements across the
company
B The company's large size
C The high level of financial expertise available
throughout the company
D The authoritarian leadership style of the finance
director
E Poor downward communication
(LO 3.2.4) (2 marks)
47 The sales department of Martinette plc is currently negotiating with a

national supermarket chain to persuade the chain to stock the company's
latest domestic cleaning product. The supermarket chain, however, is
disappointed to hear that Martinette plc will not be undertaking any
consumer advertising of the product at its launch.
The promotion technique being pursued by Martinette plc for the new
product can, therefore, be characterised as a:
A Push technique
B Public relations technique
C Pull technique
D Sales promotion technique
(LO 4.2.3, 4.2.4) (2 marks)
48 The chief executive of Darley plc is considering a number of strategic options

facing the company. The Johnson and Scholes criteria against which these
would usually be judged are:
A Economy, effectiveness and efficiency
B Economy, expectation and efficiency
C Acceptability, congruence and feasibility
D Acceptability, suitability and feasibility
(LO 3.1.11) (2 marks)
CA Sri Lanka 137

49 Mandil works at a large car manufacturing factory. He is a manager

responsible for a team of car production workers who fit seats into the new
vehicles. He sets the team clear targets for seat installations each day based
on the goals handed down to him by the directors. He monitors performance
closely to ensure targets are met. It is clear that, in terms of Mintzberg's
building blocks and co-ordinating mechanisms of organisational structure,
Mandil is part of the organisation's:
A Operating core
B Middle line
C Strategic apex
D Technostructure
(LO 3.2.3) (2 marks)
50 Identify which of the following statements about an information processing

system is correct.
A Rules and information are processed to suggest decisions
B Information is input and processed to produce data
C Data are input and processed to produce information
D Rules and information are used to produce data
(LO 4.4.2) (2 marks)
138 CA Sri Lanka

140 CA Sri Lanka

Mock Exam Answers
1 C Customers will be the group who are most adversely affected by the
change, and are therefore most likely to object to it, because they will
have to pay higher prices to buy the products.
The directors' motivation in increasing prices would appear to be to
improve profitability following the increase in the cost of the raw
materials. Shareholders would be likely to support actions designed to
improve profitability rather than to oppose them.
Suppliers are responsible for the rising cost of the raw materials, but
would have no direct reason to oppose an increase in the price of the
final product.
2 A Knowledge support systems record and store the knowledge held

within an organisation.
Expert systems allow users to benefit from expertise by holding
specialised data and rules about what to do in given sets of
circumstances.
Executive support systems help senior managers make strategic,
unstructured decision.
Decision support systems combine data and analytical models or data
analysis tools to support semi-structured and unstructured decision
making.
3 C Monetary policy is concerned with interest rates and the total supply of
money in circulation. The other choices relate to fiscal policy.
4 C Workers leaving Z to work in foreign countries means the labour

supply curve in Z will shift to the left (inwards). This resulting
equilibrium between supply and demand now occurs at a higher wage
rate but a lower quantity than before.
5 C Fayol's five functions of management are: planning, organising,

commanding, co-ordinating and controlling. It is assumed that
subordinates will carry out a command whether motivated or not.
6 B Designing systems and standardising work.

Securing inputs is the role of the operating core.
Organising and controlling work is carried out by the strategic apex
and the middle line.
7 D Undifferentiated marketing involves producing a single product and

getting as many customers as possible to buy it. There is no market
segmentation.
CA Sri Lanka 141

8 B Although there is a surplus, this does not mean that the good is no
longer scarce. At the current price, however, buyers desire less of a
good than sellers want to bring to the market so there is a surplus.
Scarcity indicates that a good is less freely available than consumers
would like.
9 B, D A co-operative is a private sector business which is owned by its
workers or customers, who share the profits.
Sometimes co-operatives are not primarily profit seeking, but this may
not be the case here. Other features of co-operatives include open
membership, democratic control, distribution of surplus in proportion
to purchases and promotion of education.
10 C Corporate governance relates to the systems by which organisations
are directed and controlled.
Corporate governance is wider than simply relating to the agency
relationship with shareholders.
Corporate governance can be based on either rules or principles, they
are not necessarily dictated by the laws of a country.
A market where a small number of dominant firms control prices and
quantities is an oligopoly.
11 B To be straightforward and honest in all business and professional

relationships means to act with integrity.
12 D Nothing. A minimum price (floor price) only leads to excess supply if it

is set higher than the equilibrium price.
13 A Tea is the closest substitute of coffee, so a number of consumers are

likely to switch to drinking tea as coffee becomes increasingly
expensive. Therefore, the demand for tea is likely to increase.
14 C It is true that under monopolistic competition there will be free entry

and exit from the industry in the long run. There will be a large
number of fairly small, not large, firms and they will each act
independently, not collaboratively, with others in the industry.
15 D Recession is part of the business cycle: demand for output and jobs
falls, and unemployment rises until recovery is well under way. Option
A is an example of frictional unemployment; option B of seasonal
unemployment; option C of technological unemployment.
142 CA Sri Lanka

Mock Exam Answers
16 C A centralised organisation is one in which authority is concentrated in

one place. If all decisions are made in the same place then it will be
easier for the decision-makers to see the 'bigger picture' and therefore
understand the consequences of their decisions. Options A and B are
advantages of decentralisation, where decisions are delegated.
17 C Management information is used for planning, control and decision-

making.
Research and development is more likely to lead to the creation of
management information that will then be used for the purposes
described above, most likely decision making.
18 C Managers in a public sector organisation work on behalf of the

government, though it will serve the needs of the general public.
Managers of private sector organisations work on behalf of
shareholders, while managers of charities work on behalf of trustees.
19 B The protest group has a high level of interest in the proposed factory,
but little power to affect change. This group should be kept informed
of the developments related to the factory in order to minimise the risk
of this group influencing others who may have more power to stop the
factory being built.
20 Wastage per unit of output Efficiency

Productivity per person per hour Efficiency
Product quality Effectivenes
21 D This describes selling rather than marketing.
22 C In the long run an organisation can change the scale of operations and
there are no fixed costs in the long run.
23 A An expert system could be best described as a database built on

knowledge and experience. The other answers are tools to hold
knowledge rather than use it.
24 B The effect of the increase in household income will be to increase the

demand for all normal goods at any given price, meaning that the
demand curve will shift to the right (to D1).
Similarly, the effect of the fall in average unit costs of production will
mean that the supply curve shifts to the right (to S2).
Point B represents the new equilibrium, ie the intersection between D1
and S2.
CA Sri Lanka 143

25
Year Relationship between supply and demand
20X1–20X6 Supply < Demand
20X7–20X9 Supply > Demand
The fact that house prices are rising between 20X1 and 20X6 indicates
there must be a shortage of houses during that period. Therefore,
supply is less than demand (or, alternatively, demand is greater than
supply).
By contrast, between 20X7 and 20X9, the falling price indicates there is
a surplus of houses, so supply is greater than demand.
Supply only equals demand when the market is in equilibrium, at
which point prices remain stable.
26 D In order for prices to fall, the supply of houses must increase – in other
words, there is an outward shift in the supply curve.
Lower input costs and government subsidies will both reduce the costs
of production and thereby encourage builders to build more houses at
every price – prompting an outward shift in the supply curve.
However, reducing the number of firms building houses would be
expected to restrict supply, rather than increase it.
26 D In order for prices to fall, the supply of houses must increase – in other
words, there is an outward shift in the supply curve.
Lower input costs and government subsidies will both reduce the costs
of production and thereby encourage builders to build more houses at
every price – prompting an outward shift in the supply curve.
However, reducing the number of firms building houses would be
expected to restrict supply, rather than increase it.
27 Increasing household incomes – Shift in demand

Reduction in the cost of mortgages – Shift in demand
Shortages of available land - Shift in supply
As household incomes increase, many people are likely to spend their
extra income either buying a house for the first time, or moving to a
more expensive one. Therefore, the increase in income leads to an
outward shift in the demand curve for houses.
The low cost of mortgages (low interest rates) will also increase
demand, because people who may not have been able to afford
mortgage repayments when the cost was higher are now able to do so.
This again will lead to an outward shift in the demand curve.
144 CA Sri Lanka

Mock Exam Answers
A shortage of available land is likely to mean that construction

companies are not able to build the number of houses they might
otherwise want to at any given price. In effect, this will lead to an
inward shift in the supply curve.
28 A A 10% fall in the price of a product will lead to a 20% increase in sales
volume where the price elasticity is −2.
Note that elasticity of demand measures percentage change in quantity
demanded in relation to percentage change in price.
Elasticity of –2 indicates that the product is elastic and therefore total
revenue will increase following a fall in price. However, it will not rise
by 20%.
29 As a firm has grown, workers have been able to specialise in a

particular job and become increasingly efficient at that job – Internal
economy of scale.
As an industry has expanded, there has become an increasing shortage
of skilled labour – External diseconomy of scale.
As an industry has developed, banks have developed a better
understanding of the industry's requirements. – External economy of
scale.
Management have experienced problems of co-ordination as the
number of divisions in a firm has increased – Internal economy of scale.
Internal economies of scale arise when a firm's costs per unit of output
decrease as the firm's scale of production increases. Specialisation, and
division of labour, only become possible once a firm reaches a certain
size.
Internal diseconomies of scale arise when a firm's cost per unit of
output increases as the firm's scale of production increases. The
increasing scale of production could make it more difficult for
management to co-ordinate production across the firm.
External economies of scale arise where a firm's costs per unit of
output decrease as a result of the increasing size of its industry as a
whole. The facilities and support services that can be shared by all
firms in an industry contribute to external economies of scale.
External diseconomies of scale arise when a firm's costs per unit of
output increase as the size of the industry as a whole increases. The
shortage of skilled labour, resulting from the growth of the industry,
means that the cost of hiring staff will increase, so this is an external
diseconomy of scale.
CA Sri Lanka 145

30 Low levels of aggregate demand mean the equilibrium level of national

income is below the level needed to achieve full employment –
Depression.
Modest rates of economic growth. Improving consumer and business
confidence, leading to greater expenditure – Recession.
Falling levels of business and consumer confidence. Falling levels of
production. Rising levels of unemployment – Recession.
Low levels of unemployment. High inflation due to excess demand for
labour and other resources. Increasing deficit in balance of trade –
Boom.
Recessions are characterised by falling levels of national income
(negative economic growth). As national income falls, business and
consumer confidence also falls. One of the main factors behind the
negative growth is typically falling levels of aggregate demand. In turn,
firms respond to the lower demand by producing less, and reducing
their workforce.
During the depression phase of the trade cycle, an economy will be
stuck at low levels of national income, giving rise to a deflationary gap
(where the level of aggregate demand is below that needed to assure
full employment in the economy).
During a recovery phase, the level of national income will begin to rise
again. This economic growth will help to reduce unemployment levels,
and will help to improve consumer and business confidence. In turn,
this confidence will lead to greater expenditure, which will help to
sustain the recovery.
The boom phase of a trade cycle will be characterised by high levels of
demand – both for products and for factors of production (such as
labour). If aggregate demand exceeds aggregate supply this will lead to
inflation. Also, if aggregate demand for products cannot be met from
domestic production, the level of imports will increase to help make up
the shortfall.
31 A Inflation targeting is a policy in which the central bank uses interest

rate changes and other monetary tools to control inflation towards a
target rate.
Interest rates and the inflation rate tend to be inversely related so, as
inflation appears to be above the target, the bank is likely to raise
interest rates to reduce aggregate demand in the economy and help
bring down inflation.
Increasing the money supply is likely to increase inflation and so will
exacerbate the problem rather than help to fix it. Similarly, increasing
the budget deficit will be expected to increase aggregate demand
rather than helping to reduce it.
146 CA Sri Lanka

Mock Exam Answers
The presence of high inflation and high levels of aggregate demand

suggests that there could be an inflationary gap in Bosland. Measures
designed to reduce aggregate demand will be more likely to lead to an
increase in unemployment than a fall. (As demand for products fall, if
firms start to have spare capacity, this could lead to them reducing the
size of their workforces.)
32 D Option 1. Although the theory of the multiplier effect suggests that the
overall increase in national income following an injection into the
economy will be greater than the initial economy, this may not
necessarily be the case with government expenditure, because the rise
in government expenditure might simply replace some private
expenditure. For example, improvements in publicly funded health
care may lead to fewer people paying for private treatment.
Option 2. describes the 'crowding out' effect. If the Government is
competing against private sector firms to borrow money, it may have
to offer higher interest rates in order to do so. But this will force
private firms to also offer higher interest rates, which could discourage
them from investing and higher interest rates could also discourage
individuals from buying on credit. Therefore, government borrowing
'crowds out' private borrowing, with the result that aggregate demand
rises less than expected.
Option 3. Interest rates (monetary policy) can be changed in a matter
of hours, through intervention from a central bank. Fiscal policy can
often take months to introduce, due to the need to pass legislation to
change tax rates. These time lags can be problematic – for example, if
economic growth slows down, meaning that a deflationary policy
designed to control a boom actually gets implemented once the
economy is already in recession.
33 A The increase in interest rates will be expected to lead to a reduction in

consumer spending – either because people choose to save rather than
spend, or because their disposable income is reduced as interest-based
expenses such as mortgage payments increase. Therefore, an increase
in interest rates will lead to a reduction in Z Co's sales.
Z Co will have to pay interest on the loans it took out to acquire its new
premises, so the increase in interest rates will mean it incurs higher
interest expenses. In turn, this will reduce the company's profit margin.
34 C, D Fiscal policy is all about government tax (whether indirect or direct)
and government spending.
Capital goods are investments in capital equipment such as schools /
hospitals.
CA Sri Lanka 147

Notes on incorrect answers:

Stimulating private sector investment by cutting interest rates is part
of monetary policy.
Manipulating exchange rates by buying and selling foreign currency
reserves is part of exchange rate policy which is normally considered
to be part of monetary policy.
35 A, C, D, F
One of the key points about the PESTEL framework is that it looks at
external factors.
Points B and E relate to the company's internal strengths (E) and
weaknesses (B), rather than external opportunities or threats.
Option A is a political factor, C is an economic factor, D is a social factor
and F is a technological factor.
36 D The objectives is specific, measurable and achievable (in the light of

recent performance) but there is no statement of the timescale within
which the objective is to be met (within one year? five years?).
37 D The span of control is defined as the number of employees directly

responsible to a manager.
38 B The divisional structure is not one of Mintzberg's components of

organisation structure. The other correct terms are middle line and
support staff.
39 B Prathik would exercise functional authority.

Prathik's position does not have line authority by virtue of Kanuki
being a subordinate (D); nor is it limited to staff authority as he does
have the right to influence decisions taken by other departments (C);
not is it specifically project authority as Kanuki is not a member of the
project team.
40 Technological developments have supported corporate delayering -

True
Technology developments tend to adversely affect employee relations -
False
Technology developments create risk for long-rang product/market
planning - True
Technology developments offer significant disadvantages for corporate
communications - False
148 CA Sri Lanka

Mock Exam Answers
'Technology developments have supported corporate delayering' is

true, because IT systems support lower-level decision making and
direct communication between strategic apex and operational staff:
replacing the role of middle management.
Technology is no longer regarded purely as a threat to job security: it
can also support higher-level skilling, options for home-working,
cleaner and safer work environments, better employee
communications (eg through an intranet) and so on.
'Technology developments creates risk for long-range product/market
planning' is true, because new technologies reduce product life cycles:
products and processes can swiftly become obsolete.
'Technology developments offer significant disadvantages for
corporate communications' should be obviously false: think of e-mail at
one end of the scale, and 'virtual organisations' at the other.
41 C While demographics (D) may be used in the process of segmentation,

the description relates to segmentation itself.
42 A Under the authoritarian leadership style, people are treated like

machines to get the task done.
43 A Randul does not possess expert power (B) due to his absence of formal
qualifications, nor does he possess legitimate power because his power
does not derive solely from his position within the organisation (note
he exercises power over his superiors (C), and his power is not
coercive - there is no evidence of force or punishment as a means of
power (D).
44 A Jester plc's activities exactly match the approach of a typical sales-

oriented organisation. This is because it is focused primarily on selling
the existing inventory.
It has closed down the department that relates to customer needs, so it
is not focused on the market and therefore does not have a market or
marketing orientation.
It also does not have a product orientation as to do so would require a
focus on the development of new products, rather than those that have
already been developed as in the case of Jester plc.
CA Sri Lanka 149

45 A sense of challenge in a job Motivator
Working conditions in a job Hygiene
Relationships with other staff Hygiene
Recognition Motivator
Hygiene factors are those that merely assist in avoiding demotivation

and dissatisfaction. Challenge and recognition are motivator factors
46 A Yes
B No
C No
D Yes
E Yes
If the organisation is large (B) this should facilitate decentralisation, as
should the availability of financial expertise throughout the company
(C). However, (A), (D) and (E) are factors that might impede
decentralisation, in the case of (A) because there might be few
perceived benefits to decentralisation and in the case of (D) because of
a refusal to 'let go' and trust others. Poor downward communication
(E) also militates against decentralisation.
47 A There is no evidence of any public relations activity (B), or any sales

promotion incentives (D). There is also to be no advertising to
consumers, which would be a pull technique (C). Ensuring the
availability of the product to consumers by encouraging intermediaries
to stock the new product is a push technique (A).
48 D Strategies are assessed based on the Suitability, Acceptability,

Feasibility criteria
49 B The middle line conveys the goals set by the strategic apex and controls
the work of the operating core in pursuit of those goals.
50 C (A) refers specifically to an expert system, whilst (D) is a corruption of

(A). Data provide the raw material from which information is produced
(C), not vice versa (D).
150 CA Sri Lanka

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PRACTICE & REVISION KIT

CA SRI LANKA CURRICULUM 2020

ISBN 9781 5097 3133 6

British Library Cataloguing-in-Publication Data

BPP Learning Media Ltd

The copyright in this publication is owned by

All rights reserved. No part of this publication may be

The contents of this book are intended as a guide and not

Every effort has been made to contact the copyright holders

We are grateful to CA Sri Lanka for permission to reproduce

BPP LEARNING MEDIA

Mode: Computer based examination

Knowledge Process Verb List Verb Definitions

Relate To establish logical or causal connections

State Express something definitely or clearly

Tier – 2 Comprehension Calculate/Compute Make a mathematical computation

Recognise To show validity or otherwise, using knowledge

Summarise Give a brief statement of the main points (in

Prepare Make ready for a particular purpose

Prioritise Arrange or do in order of importance

Reconcile Make consistent with another

Solve To find a solution through calculations and/or

Evaluate To determine the significance by careful

Tier – 6 Synthesis Compile Produce by assembling information collected

PART A QUESTIONS: BUSINESS AND ORGANISATIONAL ENVIRONMENT

1 Introduction to organisational environment

1.2 An organisation is owned and run by central government agencies. The

1.4 Which of the following best completes the following statement:

1.5 Which of the following are features of not-for-profit organisations?

The following information relates to Questions 1.6–1.8.

Drop down list:

A company whose shares are bought and sold on a stock 

Drop down list:

Organisation 1 – Prevent crime and protect local 

Drop down list:

1.9 Which TWO of the following are NOT general characteristics of an

1.10 Which of the following groups may be considered to be stakeholders in the

1.12 Perway Co is a large, manufacturing company. Identify whether each of the

1.14 Which of the following statements are true?

1.16 Which of the following is not part of the task environment?

1.19 Em Co, a firm of chartered accountants, is currently undertaking an

1.21 Which one of the following is NOT an example of corporate social

PART B QUESTIONS: NATURE AND SCOPE OF BUSINESS MANAGEMENT

2.2 According to Drucker, which one of the following is a management task?

2.3 Which of the following is not an element of the management process?

2.4 The approach to effectiveness measures effectiveness by

Reduction, or containment of cost 

2.8 Performance measures can be approached in three different ways: economy,

2.9 Who argued that management should be based on 'well-recognised, clearly

PART C QUESTIONS: FUNCTIONS OF MANAGEMENT

3 Planning and control

3.2 Which of the following terms is NOT true of budgets?

3.3 Which of the following terms is NOT an advantage of planning?

4.3 Which of the following principles of classical management is challenged by

Drop down list:

4.8 Henry Mintzberg categorised five basic components of an organisation.

4.10 Which of the following are components of an organisation according to

4.11 The following diagram is of Henry Mintzberg's organisational configuration

4.12 Which of the following organisational structures encourages employee

4.13 Mintzberg's design of an effective organisation does NOT include which of

4.15 Dispersed and virtual teams are normally a result of:

4.16 Choose from the following words to complete the sentence.

5 Leadership, motivation and communication

5.2 Which of the following models of human behaviour emphasise the