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Business Studies Level M Course Questions Solutions
Business Studies Level M Course Questions Solutions
Business Studies Level M Course Questions Solutions
identifying their preferences and predicting their possible consumption habits in an attempt to
increase profit margins.
b) Marketing will help Tom analyze the reasons behind changes in consumption patterns and
the importance of trends in consumer habits or preferences. Tom will be able to assess the
competition level in the local area and understand the reasons why some markets became
more competitive than others. Through marketing, he will identify a way to react and respond
to higher competition and changes in consumer patterns, and inform his consumers about his
new business.
(2) 2. A market-oriented business is usually better because it is less risky than a product-
oriented business because it can guarantee sales, since it supplies what consumers want.
However, this will depend on the type of product. For instance, a product-oriented business
can succeed if it supplies a top quality, highly-innovative product.
(3) 3. a) P&M is a market-oriented business because it conducted market research to identify
the commercial preferences of consumers before designing and selling its new product.
b) The probability of success of a market-oriented business is high since the research
conducted before launching a new product ensures that the item will be introduced where
there is a market and a consumer base. This guarantees sales and enhances efficiency since
revenues will be generated. Also, this motivates managers to search for possibilities for
further profits.
(4) 4. a) sales
b) promotion
c) R&D
d) distribution
(5) 5. G Informing customers about products and identifying their preferences in order to
make profit.
(6) 6. G A product-oriented firm develops a product without prior research of customers’
needs, and then finds a market to sell it. A market-oriented firm studies the markets’ needs
and then supplies the product according to consumers’ needs. By doing so, it guarantees
sales.
(7) 7. G Marketing is used to help a business:
marketed before, and using aggressive marketing campaigns. These strategies allow the
business to enter new markets, expand, increase market share, as well as sales and
profitability.
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(9) 9. a) Developing a marketing plan allows the business to reach the greatest number of
consumers by making decisions about the marketing mix elements.
b) An efficient marketing plan allows the business to use its resources (i.e., money and time)
efficiently which helps it remain competitive. It allows the business to adjust to anticipated
changes in the market by avoiding potential threats, and grasping new opportunities. The
business can also use the marketing plan to monitor performance and ensure that it is
achieving the overall corporate objectives.
(10) 10. G Product, price, place, promotion
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d)
(14) 14. a) A product-oriented firm considers the quality and price of products prior to
searching for markets or establishing new ones. A market-oriented business carries out the
necessary research to understand the commercial preferences of consumers, before
developing its products.
b) In a mass market, a standard product is sold in bulk, at a relatively low price. A niche
market tends to be a smaller section of a mass market that promotes more specialized
products.
c) The marketing strategy outlines how the company intends to achieve its marketing
objectives by considering the overall approach to be taken by the entire enterprise. A
marketing plan is a written document that provides details about the necessary actions needed
to achieve one or more marketing objectives.
d) Consumer market is for goods and services aimed at households. Industrial market is for
manufactured goods (or capital goods), aimed at businesses.
(15) 15. a) The market share decreases when competitors attempt to “steal” the consumers
from t business.
b) A low market share limits the market power and influence of the firm and reduces its
competitiveness.
(16) 16. a) Supplying to a mass market is beneficial because it leads to economies of scale
from large scale production and diversification, and it increases profits and competitiveness.
b) - Increasing or maintaining a solid market share in an attempt to overcome competitors,
penetrate the market, and expand.
- Improving or maintaining a positive image of a product or firm.
- Developing new products or improving existing ones in order to enter new markets and to
avoid loss-making products.
- Increasing sales revenue and profitability.
(17) 17. a) The lack of market research about what consumers are demanding greatly increases
ingredients help differentiate the product, giving it the ability to meet the public's demand to
eat healthy. Weaknesses: no reference Opportunities: high incomes and employment in a
booming economy allow for faster expansion and higher production. Threat: high
competition will require continuous marketing and R&D.
b) The SWOT analysis is a technique used to assess a product through studying and
analyzing its strengths, weaknesses, opportunities, and threats.
(19) 19. a) A market can be segmented by age; people of the same age share similar interests.
For instance, older people look for different things in a good/service than younger people. A
market can also be segmented by gender; for instance, male and female consumers (both
young and old) have different commercial needs and preferences. Therefore, markets have
developed to cater to these differences (e.g., men’s designer clothing, and cosmetics for
women).
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b) By identifying the target markets and dividing consumers into segments, a business can
identify the segments “left behind” by competitors and develop a product to meet the demand
of the small segment or niche market
(20) 20. a) The elements of the marketing mix are product, price, place, and promotion.
b) The automobile industry (e.g., Ford) might concentrate on civilian vehicles and those
required by the military. Depending on its purpose, the process of promotion will include
social media or other advertising methods to target the different segments. The price it sets
will depend on the various income groups within the identified market segments. Ford
will determine the place to make its vehicles available, based on the location of consumers
and suppliers of resources
(21) 21. a) financial market
b) consumer market
c) industrial market
d) commodity market
(22) 22. a) The internet encouraged e-commerce which facilitated the transfer of money and
enabled consumers to purchase goods and services online. This resulted in a wider variety of
products to choose from, thus increasing the number of competitors each business has.
b) globalization and improvements in transportation
(23) 23. a) The bakery lost some of its customers to new rivals.
b) The bakery can improve the quality of its existing doughnuts and work on creating a new
type by adding new flavors or designing new shapes.
(24) 24. a) age
b) socio-economic grouping
c) use of the product
(25) 25. G Changes in price, incomes, population, income tax, fashion or tastes result in a
subsidies, using information technology and the internet to sell more, eliminating trade
restrictions on international trade
(27) 27. G Develop new products or add features to existing ones
consumed due to low competition, firms can charge premium prices, firms can build
consumer loyalty
Drawbacks: cannot produce in bulk and achieve economies of scale
(29) 29. G Achieve economies of scale, supply to a larger market and even internationally,
ability to lower costs of production, ability to survive even if consumers change their tastes
by supplying alternatives.
(30) 30. G Allows to increase sales and revenues
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T a) A “more competitive market” means additional enterprises will be offering the
(33) 33.
same goods and services that are aimed at the same market segment.
b) Market share = (sales of the company/total market sales) × 100%
➔ Sales of company = (market share × total market sales)/100% = (20 × 70m)/100 =
$14 million.
c) The market share of this business has decreased and this is could be due to:
- Competitors who attempt to obtain a higher percentage of the market share by
providing more highly innovative goods.
- Failure to set the most beneficial price, which results in loss of consumers to
competitors.
- Quality control issues, which result in dissatisfied consumers and lowers sales.
d) Even if new products are developed, this cannot guarantee sales. This is because
the price set or the quality might not allow the business to compete. However, if the
variety provided is better than in the market, the managers’ strategy would be
beneficial.
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and obtain detailed information. Also, face-to-face interviews provide detailed insights from
signs such as body language which assist these studies.
(36) 3. a) A business can carry out primary research by collecting original or first-hand
information through direct contact with customers such as interview surveys, questionnaires,
etc.
b) The primary research conducted by the chips producer targets a specific purpose which is
identifying consumers’ flavor preference by directly gathering information from them to
decide on the new flavor accordingly. The producer also determines the exact source of
information which allows him to classify it by target market such as age or gender.
(37) 4. G Market research is used:
- To identify who the consumers are and what prices they are willing to pay.
- To increase the demand for a product.
- To become more competitive.
- To advertise efficiently.
- To develop better products.
- To identify which products are profitable and which prices are consumers willing to pay.
(38) 5. G Primary research is conducted by the business itself and it answers a specific
purpose. It is more accurate and specific. It includes quantitative and qualitative data that is
genuine.
(39) 6. G It allows to identify potential consumers, know what they prefer, and supply
products that allow the firm to better compete in the market and make profit. Through market
research, the firm can plan better on the four elements of the marketing mix, especially the
price.
(40) 7. G Benefits: data is up to date and serves a specific purpose
Drawbacks: time consuming and expensive, involves a certain degree of bias and data may
not be useful if the employees who are collecting it are inexperienced.
customers think about the service. He can also conduct a survey to determine what is causing
consumer discontent.
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b) To guarantee better market research results, he can hire a market research agency that has
the ability to conduct any market research investigation or inquiry. Specialized agencies have
the know-how which saves the business time and increases the accuracy of the data.
(43) 10. a) Primary research would be more useful for the company because it is launching a
new drink. Primary research is a market research method that involves gathering original or
first-hand information and collecting new information that answers a specific purpose.
Collecting secondary research would be misleading in this case.
b)
(44) 11. a) It is important for a company to be aware of the competition in an entire market
before launching a new product as it helps to know how the product will compete. The
business will also learn about its competitors’ strengths and develop items that will give it a
competitive edge.
b) Primary research is more useful. For instance, by conducting a SWOT analysis, a business
can change its marketing strategy in order to compete more successfully. It also gains a
greater working knowledge of consumer trends or views, products, and the overall reputation
and public perception of a business.
(45) 12. a) primary research
b) secondary research
c) primary research
d) secondary research
(46) 13. G Secondary data might not answer a specific purpose and hence could not be used
research. However, it collects first-hand data that is more accurate and that serves a specific
purpose.
(48) 15. G
- Less expensive and less time consuming than primary data, but it serves another purpose.
- It includes articles from magazines, newspapers, and the web.
- It can be used to complement primary research.
(50) 17. G
c) Questionnaires: primary
d) Focus groups: primary
(51) 18. G Use clear language, no jargon, and hire experienced employees who know how to
develop clear questions in questionnaires and analyze data without bias. Also, by making
questions short, easy to understand and easy to answer.
(52) 19. G Specialized research agencies have the know-how and the ability to increase the
accuracy of the data. They can also provide information about competitors’ products and
advise managers on how to increase competitiveness. They also save time for the business.
$45,000. However, the sales of carrots decreased continuously from $70,000 to $60,000.
b) According to the data, if sales are increasing annually, he should increase his product
range. If, on the other hand, the data shows that they are decreasing, he should do the
opposite since successful products are usually in demand, while those not successful are not.
Given this quantitative data, he should produce more tomatoes and less carrots.
(54) 21. a) Tables collate and demonstrate data efficiently and articulately. However, it is
c) This information can be used to determine the drinks preferred by women and men. The
data can be used to determine the target market or segment, and determine the type of drink
that will guarantee high sales.
d) The data collected from the website might be outdated. In addition, the business cannot
identify why men or women favor a certain beverage. The firm should be also concerned
about this data because the samples surveyed might not be representatives of the whole
market.
(55) 22. G Tables, charts (line and bars), pictograms, and maps.
(56) 23. G Facebook has the highest activity in terms of use, meaning it is the mostly used
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share and respond to market changes. Also, a business can develop genuine products, and sell
them at higher prices to make additional profits. It does so to win a competitive edge.
(59) 3. G Consumer goods and services and producers goods and services.
decline.
b) First, the life cycle of product B is longer than that of product A. Product B is more
successful than product A because with product A the decline stage occurs directly after a
very short maturity stage. This reveals lower sales that product B.
(61) 5. At the introduction stage, the product is launched for the first time into the market. The
high costs which could affect the financial situation of a business. It is better to add features
to existing products and extend their life cycle, since it is cheaper and incurs less risk.
(63) 7. The company can sell the jeans in a new market, target a different market segment such
as children and slim individuals, add new designs, and encourage customers to buy more
jeans of different colors.
(64) 8. a)
b) He can target a different market segment by developing games for different age groups. He
can also add new features or improve the existing games by changing the design or making it
an online game.
c) A product with a short life cycle incurs losses for a firm and requires it to either develop a
new product or shut down its operations. In the decline stage, no profit is generated
encouraging competitors to take advantage of their rival’s declining products to develop a
better alternative. This reduces the market share and reflects negatively on the image of the
business.
(65) 9. a) It is important for a marketing manager to understand the concept of the product life
cycle, since it projects the level or pattern of a product’s sales over time. This allows the
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manager to develop a new marketing mix and introduce necessary changes to maintain
profits.
b) Yes, because it might not be launched or advertised immediately and effectively. Also, the
costs at the beginning might not be covered by sales revenues.
(66) 10. G Development, introduction, growth, maturity, saturation, decline.
(67) 11. G Different products have different life cycles and they are usually bell-shaped. A
business can find ways to extend the maturity stage and prevent the product from declining.
(68) 12. G - Lowering the price of the product.
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b) It could sell the product in a new market: The business might consider selling its
products overseas, especially if foreign markets are less competitive than domestic
ones.
(71) 15. T a) The end of the maturity stage means that sales have reached their peak and the
market has become saturated. It can be very difficult for companies to maintain their
profits, let alone continue trying to increase them, especially in the face of what is
usually fairly intense competition.
b) - Add new features to, or improve the existing product: The business can make
small changes to the product design, color, or packaging, in order to make it more
appealing to customers.
- Sell through additional retail outlets: If the product is sold only in one store, the
business can work on the “place” element of the marketing mix and make the product
available in different locations.
building a brand image and helps the business differentiate its products. However, packaging
refers to how a product is presented. It is the physical container or wrapping for a product.
b) It will not appeal to customers because packing improves the selling appeal. A proper
package is a means to attract customers. For instance, the use of colors and shapes can help a
product stand out against competition.
c) They package their products because a package protects the product, improves the selling
appeal, displays information, promotes the brand, extends the life cycle and facilitates the use
of the product. It is also a mean to promote the products.
(73) 18. a) The owner can create a unique selling point for the clothes such as selling shirts
with a special design at a lower price than any other shop in the mall, or he can use branding
by developing a brand name for his clothes as well as a trademark.
b) With time, consumers might develop brand loyalty to the clothes sold in this shop which
ensures high sales and makes it easier for the owner to launch new collections or styles. This
is due to customer faith in the shop’s products
and willingness to purchase without hesitation, especially if the brand name is synonymous
with high quality.
(74) 19. a) McDonald’s chose a distinctive name to differentiate it from other businesses in the
same industry and developed it into a trademark that cannot be used by others and that can be
identified by all customers easily through the letter “M”.
b) A well-established brand name ensures high sales for McDonald’s and allows it to
diversify since launching new items can easily attract consumers who know the brand and
trust it.
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c) Because of brand loyalty developed towards McDonald’s. Consumers trust the brand even
if bad rumors surround it. Successful marketing strategies also allow McDonald’s to maintain
its high sales in such situations.
(75) 20. Quality affects the ingredients, the package, the price, and the use of the product. A
high-quality product stands out from other products and easily attracts consumers. Usually a
high-quality product can sell at a higher price.
(76) 21. G Differentiation, greater consumer loyalty, product differentiation, higher
competition and better consumer recognition of the brand. A good brand also allows the
business to raise the price level.
(77) 22. G The package protects the product content, helps promote the brand and image at
no extra cost, extends the product life cycle, gives consumers details about the product and
help them to easily identify it.
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b) An increase in income increases the demand for normal goods and a successful advertising
campaign results in an increase in demand.
c) Higher production costs, higher taxes and bad weather decrease the supply of a product.
(321) 2. a) An increase in price will lower the demand for a product. However, this will depend
on elasticity. An elastic demand would see a sharper decrease following an increase in price
than an inelastic demand.
b)
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(79) 3. a) If demand is elastic, an increase in price will cause sales to fall by more than the
percentage change in price. However, if demand for a product is inelastic, an increase in price
results in sales falling by less than the percentage change in price.
b) Products that are easily substituted for more economically priced alternatives and products
that are not a necessity are likely to have high elasticity, such as jewelry or other luxury
items.
(80) 4. a) It depends on the elasticity of demand of petrol. Petrol usually has an inelastic
demand, meaning revenues will increase following an increase in price, because consumers
will not be highly responsive to changes in price.
b) This is done because the demand of food and beverage is decreasing when fewer motorists
stop at the gas stations. It depends on the types of food and beverage. For example, during
holidays, many customers might travel, reducing the demand.
(81) 5. No, because a business must consider both internal and external factors when setting a
price. External factors can significantly affect this decision as they provide information about
consumers’ willingness to pay, competitors’ prices, the type and nature of demand, the legal
requirements, and the industry trends.
(82) 6. Because some external factors cannot be controlled and because setting a price that is
not suitable for the market or consumers will cause losses to the business.
(83) 7. a) Medicines have highly inelastic demand as they are considered necessity goods.
b) Since the demand for medicines is inelastic, an increase in price either reduces the quantity
demanded by a smaller proportion, or has no effect on the quantity demanded if demand is
perfectly or highly inelastic. A higher price with a slight (or no) decrease in quantity
demanded increases total revenue:
TR = Price × Quantity.
(84) 8. G Prices are affected by costs, objectives of firm, the number of rival firms and the
degree of competition.
(85) 9. G - An increase in incomes.
- An increase in subsidies.
- A decrease in the costs of factors of production.
- A decrease in corporate taxes.
- An increase in productivity and technology.
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(87) 11. G Product is not habit forming or a necessity and it has many substitutes.
(88) 12. G For elastic demand, as prices increase total revenues decrease. When demand is
inelastic, an increase in price results in an increase in total revenue.
(89) 13. G - When a business enters a new market or increase market share.
marketing objectives by considering the overall approach to be taken by the entire enterprise.
b) The marketing strategy provides decisions and direction regarding variables, such
as market segmentation, target market identification, marketing mix elements, and
expenditures. In this case, the Bakery is changing the marketing mix elements;
therefore, it should have a new strategy.
c) It is not always beneficial to reduce prices. It depends on the value of PED. If
demand for a product is inelastic, a decrease in price results in sales increasing by less
than the percentage change in price. This results in lower revenues and profit margins.
b) No, because the demand for its products is elastic. Moreover, the percentage decrease in
sales is greater than the percentage increase in price. This resulted in a decrease in total
revenue due to low sales.
(94) 18. Penetration pricing is used to launch a product into an existing or a new market by
selling at a lower price than competitors. An example would be launching a new chocolate
bar at a very low price in a market where many other chocolate producers already exist.
Promotional pricing is used for products with a record of decreased sales, or by businesses
that need to clear stocks by reducing prices temporarily in order to attract consumers. For
example, a clothes shop reduces the prices on an old collection in order to reduce its stock.
(95) 19. a) Psychological pricing which encourages consumers to buy it because it makes the
e) Price penetration because the new detergent is launched in a market where competitors
already exist; therefore, a low price is required to attract consumers.
(96) 20. G Price skimming, penetration pricing, competitive pricing, and promotional pricing.
(97) 21. G Businesses need to consider the prices, taking into consideration the prices set by
competitors. A good pricing strategy should result in higher sales and profits and hence a
higher market share and a competitive edge. The price should cover all the costs in order for
profits to increase.
(98) 22. G- A business can use price skimming when it is introducing a new genuine product
the growth stage of a product life cycle, successful products can still sell for high prices. As
the product matures, prices are decreased so that firms keep competing in the market.
b) At the introduction stage of a product life cycle, firms spend high amounts of money on
promotion to raise consumers’ interest. At the maturity stage, promotion is needed to remind
customers of the new product and sustain sales. To avoid a decline in product life cycle,
vigorous promotion is needed to encourage consumers to buy the product more often.
(100) 24. G
a) The higher price under price skimming helps the business recover its development costs
quickly and reinforces high quality when the product is branded.
b) The low price under penetration pricing attracts customers and therefore increases market
share quickly. It results in a barrier to entry to potential competitors and helps promote other
full-price products.
c) Cost-plus pricing is easy to apply, covers costs, and guarantees profit.
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be seen by anyone through the paid media such as the internet and TV. Below-the-line
activities are directly controlled by the business. These activities target a specific audience
without the use of paid media. Examples include price reductions and after-sales services.
b) To familiarize consumers with an existing or a newly released product, or remind them of
this item. It can also be used to persuade potential customers that the firm’s products are the
best in the market.
(102) 2. Promotion is affected by the marketing strategy which includes decisions about price
and product. The nature or type of product is essential in making promotion decisions; for
example a medication requires detailed information about its usage while a pen does not.
Price could vary depending on the stage of the product life cycle. Therefore, suitable
promotional techniques need to be used in order to persuade consumers to purchase the
product at the set price.
(103) 3. G The nature of the product, the marketing mix, and the competitors in the market
needed during the growth stage. No advertising is done during decline and development.
(105) 5. G Used to introduce consumers to existing and new products in order to increase
spending, assess performance and efficiency, and compare actual results in order to perform
better.
(108) 8. G - Build customer loyalty.
Section 2 Advertising
(110) 10.a) Advertising refers to non-personal, paid-for messages about goods/services or
organizations, through mass media. Party Fiesta is using the identified methods of advertising
because it is a relatively small business that supplies specified services to a small target
market.
b) It can use billboards, magazines or direct mails.
c) It should use informative advertising, since it wants to first notify its consumers about the
benefits they would enjoy if they were to purchase the service.
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(111) 11. a) His decision will mainly be influenced by the target market which could be local,
national, or international. He also needs to consider the cost of the medium used if he was to
choose advertising.
b) The decision about the type of advertising medium to select depends upon the following
factors:
- Who the media is targeting: Whether local, national, or international customers need to be
reached.
- The product: Through advertising, the media used must reflect the image of the product.
- Cost of the medium: Marketing specialists consider the cost per head.
- The stage of the product life cycle.
(112) 12. a) According to the graph, we can see that as advertising expenditures increased
between 2003 and 2007, sales also increased. But from 2007 to 2008, the cost of advertising
increased a lot but sales decreased.
b) Yes, because advertising increases sales. However, at a certain point where the product
reaches the end of its maturity, the cost of advertising will continue to rise but sales will
decrease.
(113) 13. a) A small business cannot set the same promotion strategy as a big business as this
will depend on the budget allocated and the variety and types of products. For example, a
small grocery shop will send leaflets to consumers, while a retailer such as Carrefour can use
more than one form of advertising.
b) Promotion changes as the product moves from one stage to another. For instance, when a
product is introduced, informative advertising is used. However, as sales begin to increase,
advertising becomes more persuasive. At maturity, advertising is used to remind consumers
about the product and entice them to purchase it more often. Advertising stops at the decline
stage.
(114) 14. a) Informative advertising notifies consumers about the benefits they would enjoy if
occur when production costs decrease. This causes consumers to pay less for the product
while also being educated about the goods and services that help them improve their lives.
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b) Advertising can mislead consumers by persuading them to buy goods or services they do
not need or cannot afford. In addition, some harmful products are advertised such as fast food
and demerit goods. These products are harmful to society, especially children.
(119) 19. G Advertising is a form of promotion used to inform and persuade customers about
products.
(120) 20. G Who the media is targeting, the product, the cost of the medium, and the stage of
b) The retailer can persuade consumers to purchase a product immediately without hesitation
and encourage them to switch from rivals through the use of sales promotion,. This builds
awareness for his products, reinforces his brand, and increases customer loyalty.
(123) 23. Customer service provides information about a firm’s products, assistance before and
after purchasing, and credit facilities. This helps enhance brand loyalty and can promote a
good image of the business.
(124) 24. The car toy cannot be effectively promoted by sales representatives as the product is
not custom designed for specific tastes and is not expensive enough to be promoted for
through face-to-face communication to potential clients. This method is costly and time-
consuming. A better approach would be to use sales promotion in the form of temporary price
reductions.
(125) 25. T a) According to the graph, advertising expenditure increases as sales increase. It
are needed and technical problems are likely to occur. In addition, the business will not be
able to control negative posts by unsatisfied customers.
(127) 27. Technology made communication about products between businesses and consumers
easier through the use of the internet and social media. It allowed businesses to have direct
contact with consumers by creating platforms, such as blogs and social media tools, where
products can be promoted and feedback can be received.
(128) 28. G
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bulk and orders large stocks. Since the company runs four chain stores and sells a wide range
of products, it will not be beneficial to change the distribution channel because this might
result in higher costs.
(131) 3. Place is important because the product cannot be sold if it is not available where
Since the toy manufacturer uses a direct channel, he will become worse off because of
conurbation. This is because the cost of transportation will increase.
b) The producer can use a retailer to reach consumers and restore sales.
(133) 5. a) Because consumers prefer a stress-free market, where they can purchase a
good/service that is delivered to them, and eliminate the need to go to a retail store. Also, to
eradicate the need for wholesale merchants or retailers. This lowers the overhead costs and
makes firms more environmentally friendly.
b) The benefits received from selling directly to consumers are lower overhead costs and
making firms more environmentally friendly.
(134) 6. a) Channel 1 because the product is perishable and may easily become unfit to eat so it
smaller units for retailers. Retailers then buy what they need.
b) Wholesalers usually buy their products in bulk which allows them to benefit from
discounts from the producer. They also provide delivery services and allow retailers to buy
what they need. This reduces transportation and storage costs for retailers.
(136) 8. G It is about distributing the product either directly or through intermediaries, and
products.
(138) 10. G The intermediaries used or how distribution of a product to consumers happens
refers to channel of distribution. Method of distribution refers to where the product is made
available to consumers.
(139) 11. G
a) Advantages:
- Storage facilities provided to manufacturers and retailers.
- Lower storage costs incurred by retailers
- Access for manufacturer to many markets and potential consumers.
- Credit facilities, after-sales services and advice provided by retailers to consumers.
- Promotion undertaken by the wholesalers which reduces costs for producers.
Disadvantages:
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- Lowers profits for manufacturers who sell their products at discounts to wholesalers.
- No direct contact between manufacturers and consumers.
- Higher prices in case retailers and wholesalers aim to increase profit.
- Communication problems.
- Poor quality for perishable goods.
- Expensive channel for shops that are far from wholesalers.
- Wholesalers might not have a full range of products to sell.
b) Advantages:
- Simplified and straightforward
- Lower retail price
Disadvantages:
- Impractical when customers are far from retailers.
- Does not suit products that can be easily sent by post
(140) 12. G Wholesalers buy in bulk from producers and break down the products into
(142) 14. T a) Producer to retailer to consumer, or producer to consumer since tractors are
heavy products and an explanation about the tractor is needed. A retailer that
specializes in agricultural products might be used as well to give advice to consumers.
b) Producer to agent, agent to wholesaler, wholesaler to retailer, and retailer to
consumer. Since the goods are sold in overseas markets, the producer will access the
services of an agent, who interacts with wholesalers on their behalf.
c) Producer to wholesaler to retailer to consumer, since the wholesaler will be able to
break the bulk and the retailer will be able to sell the goods on behalf of the producer
to consumers.
d) Producer to consumer, since the tailor has to directly communicate with the
consumer regarding measurements, style, etc.
(143) 15. T a) When setting a price, business managers must consider:
- The target groups the enterprise wants to attract, and their willingness to pay
- The price set by competitors.
b) The market share of a business refers to its total sales expressed as a percentage of
the market in which it operates. Since the bakery is targeting a new place, it will
attract new customers with higher incomes which could increase its sales and market
share.
b) No, because some goods such as highly perishable items might have a fast expiry date.
These products will lose quality when transported for long distances to reach the customer.
(146) 18. G Increase market share and profit through targeting consumers in a wider market.
(147) 19. G Businesses might run out of business due to higher competition.
(148) 20. G It refers to commercial transactions that are conducted electronically on the
internet.
Effects: increases the efficiency of distribution, increases competition, improves the
distribution process, lowers costs related to staffing and operations, and increases the market
share of the firms.
in delivery costs can occur, especially over long distances. Trade barriers are another problem
because high tariffs might be added to the retail price of the final product. If the tariffs
are excessive, the profit margins will suffer due to reduced sales.
c) Employing an agent can be beneficial for this company, as this will make product
transition more fluent and rapid. He provides a link between sellers and buyers by assisting in
the movement of goods through the wholesaler retailer network.
Also, the agent helps manufacturers gain a better understanding of the African markets,
choose the most effective place for selling, and identify potential market opportunities.
(151) 23. When a firm enters a new market, consumers in that market will have new
alternatives to choose from. This increases the firm’s sales and market share.
(152) 24. a) A joint venture allows a foreign firm to merge with a local one in the new market.
The local business enriches the foreign firm’s knowledge about the domestic market and
helps it adapt to the new culture. This reduces the risk of failure.
b) Licensing reduces transportation costs, trade restrictions, and time frames by giving a local
business in a foreign market the permission to manufacture products for a specific payment.
c) A foreign franchise can run and operate all the outlets in the foreign markets. This helps
the enterprise build a strong name and image in the foreign country.
d) The localization of brands allows a business to cater to local tastes and culture. This
increases sales and reduces the risk of failure.
(153) 25. G
costs.
- Wholesalers provide delivery services. This reduces transportation expenses.
b) The cost of production of CDs and DVDs is lower in China than US. In addition,
an advanced country as the USA with its known reputation can charge higher prices
than China.
c) Online transactions are prone to cyber-attacks. Transportation costs are higher than
direct sales because each product has to be packed and delivered separately. Danny
will have to face risk of fraud and he cannot test, feel or try his new products.
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liquidity levels.
(158) 2. G - The shareholders care about the profitability of the business since this affects
Sales 150,000
c.o.g.s (100,000)
Gross profit 50,000
Equipment cost (14,000)
advertising cost (16,000)
other expenses (14,000)
Net profit 6,000
dividends (2,000)
Retained profit 4,000
(163) 7. Balance sheet December 2013
MN Ltd
Assets
non-current assets 50
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current assets 21
Total assets 71
Liabilities
current liabilities 18
non-current liabilities 20
Total liabilities 38
Shareholders’ equity
Retained profit 13
Share capital 20
Total 33
(164) 8. a) Double-entry bookkeeping is a system that requires each entry of an account to have
an opposite entry. This means that credit and debit amounts in a transaction should be equal.
b) An accountant records this transaction as a $20,000 debit asset (increase in assets by
$20,000) and a $20,000 credit (a decrease in cash, due to the payment for the machine).
(165) 9. a) The income statement records the incomes and expenses of a business and has three
main accounts: gross profit, net profit, and retained profit. The balance sheet includes a firm’s
assets, liabilities, and shareholders’ equity.
b) The income statement allows managers to make profit-oriented decisions while a balance
sheet allows stakeholders to analyze the financial strengths and performance of the business.
(166) 10. a) Gross profit, which is the firm’s profit before fixed costs and expenses are
considered. Net profit (or profit), which is the profit after all expenses and overhead costs are
considered
and depreciation is recorded. Retained profit, which is the profit left after all business
payments, such as taxes and dividends, are made.
b) Retained profit can be reinvested into the business as an existing source of finance.
(167) 11. On a balance sheet, assets should balance liabilities and shareholder’s equity
b = 120 + 50 + 16 + 4 = 190
c = g = 71 - 38 = 33
d = h = 190 - 100 = 90
e = 33 - 20 = 13
f = 90 - 75 = 15.
b) The working capital of LMN Ltd. is equal to 21 (current assets) minus 18 (current
liabilities) = 3, while the working capital of OPQ Ltd. is equal to 0 (70 - 70). This means
that LMN Ltd. is in a better financial position than OPQ Ltd because it has a better potential
to cover its day-to-day expenses.
(170) 14. a) The business takes a long-term bank loan that does not need to be paid in one year.
owners’ equity, and liabilities at one moment in time. The profit and loss or income statement
records revenues, costs, and profits over a period of time.
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(173) 17. G By increasing total revenue through either selling a larger quantity or setting a
higher price, and by lowering costs of production
(174) 18. G To owners, profit is the reward for risk taking and decision making
To firm, profit helps compete, survive, and expand in markets. It also serves as a source of
finance.
To managers, profit reflects their success and guarantees raises in salaries
(175) 19. G The income statement is used to assess the profitability of a business over a
specific period of time and includes sales revenue, cost of sales, expenses, and profit.
(176) 20. G Gross profit = sales revenue – cost of sales = (1 x 2,000) – 250 = $1,750
firm owes lenders and how much it owns in assets and how it finances its payments.
This means investors are receiving 10% more return on their capital employed at Toy-R.
Thus, Toy-R investment decisions are more profitable than Toy-Z, because managers are
more successful at making higher profits from each dollar invested in the business.
b) Toy-R investment decisions are more profitable than Toy-Z, since it has a higher ROCE,
reflecting a more efficient management than Toy-Z.
(180) 24.
(181) 25. a)
This means the company made 17.85% net profit on each $1 worth of sales. However, to
determine more accurately whether the company’s overall profitability is high, we need to
compare the ratios to other years.
b) The qualitative aspects of the business performance are ignored. Also, ratios are largely
based on previously documented data. In addition to that, analysts may confront some
obstacles when attempting to compare the performance of their business with that of
competitors.
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(182) 26.
Therefore, the company cannot cover its current liabilities and current assets depend on
inventories. The business might face liquidity problems.
(183) 27. a) Shareholders and managers are interested in these ratio results, because they are
used to measure two major aspects of a business: performance (i.e., profitability) and
liquidity.
b) Yes, because the ROCE and the net profit margin increased between 2012 and 2013.
c) Yes, because the current ratio increased from 1.3 to 1.6 and the acid test ratio increased to
1. Nevertheless, this is a risky situation since for every $1 in current assets there will be a
matching $1 in current liabilities.
d) As profits are increasing, and the level of liquidity in the company is controlled, I
recommend the expansion plan for Resto. We can see from the ROCE that investment
decisions are profitable; however, the liquidity of the business needs to be improved to
guarantee the repayment of short-term debts.
(184) 28. a) Cost of goods sold = $ 350m.
Overheads = $ 110m.
b) Profit is important for Sunglass Co. because it is applied to sustain business operations and
can be used as a source of finance.
c)
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b) Cash inflow.
c) Cash inflow.
d) Cash outflow.
(191) 2. a) Gross profit = sales revenue - cost of goods sold = 50,000 - 20,000 = $30,000.
b) A business becomes insolvent when it extends the credit period to customers, purchases
resources with cash, and overtrades.
(196) 7. a) Net cash flow decreases.
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(198) 9. G Cash flow is a record of the total amount a business pays as cash outflows and the
total amount of the money received by the business as cash inflows during a specific period
of time.
(199) 10. G It guarantees liquidity of firms to pay wages, supplies of resources, rent, and
Jan Feb
Cash
inflow
Receipts 20 15
Cash
outflows
Payments 7 30
Net cash
A B
flow
Opening
5 C
balance
Closing
D E
balance
A = 20 – 7 = 13
D = 13 + 5 = 18
C = 18
B = 15 – 30 = -15
E = -15 + 18 = 3
(201) 12. G Delay cash payments to suppliers and ask customers to pay promptly, while
reducing credit sales and increasing cash sales. Use other alternative sources of finance to
ensure liquidity.
^
(202) 13. G
50,000 = =
550,000 380,000
Net cash 231,000 – 100,000 600,000 –
flow 550,000 = – 500,000 =
-319,000 380,000 100,000
=-
280,000
Opening 300,000 -19,000 -299,000
balance
Closing -319,000 + - 280,000 100,000 –
balance 300,000 = -19,000 299,000 =
-19,000 =- -199,000
299,000
Cash flow problems occur when the closing balance (receipts – payments + opening balance)
is negative in April and May and June.
(203) 14. G Profit is different from cash. A profitable business can have cash flow problems if
• Managers because it helps them identify cash shortages, plan and control the business,
and monitor and manage cash flows.
• New businesses because it helps them raise capital, attract investors, and ensure the
availability of cash.
• Potential lenders of capital such banks, because it helps them assess whether the business
is able to repay loans or not.
(205) 16. T
a)
b) The enterprise is forecasted to have a negative net cash flow over three consecutive
months. In order to overcome this, managers need to increase receipts and delay
supply payments.
(206) 17. T a) Forecasting cash inflow and outflow is important for a florist because it allows
him to control the status of the total cash available in his firm’s cash bank, and make
decisions about purchases and payments accordingly.
b) The sales for trees and flowers vary each month because of seasonal factors. The
demand for some products varies according to the season or the time of year. For
instance, the demand for flowers increases on special occasions like Valentine.
c) Wages decreased in January and February, because it is not the planting season for
trees and flowers. Thus, the florist needs less workers.
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(207) 18. T a) Negative cash flow means cash outflow exceeds cash inflow. For instance, at
the end of November, the net cash flow is: 5,000 + 1400 - (20,000 + 10,000 + 1,000)
= - 24,600.
b) The florist can delay creditor payments or postpone purchases.
c) If the problem persists, he can manage the administrative costs and efficiency by
reducing overhead costs or by decreasing employee wages. Finally, he can buy fewer
trees until he sells the available ones.
(208) 19. T a) Cash refers to physical money (e.g., coins and paper banknotes). In
bookkeeping and finance, cash refers to current assets that constitute currency, or currency
equivalents. Profit is the positive difference between total revenue and total cost of a firm.
b) It could happen, because at the same time total cost might increase. In other words,
the increase in sales revenue may be accompanied by an equal increase in costs.
b) Long-term
c) Can be short term or long term
d) Short-term
(213) 24. Using the retained profit to buy a new machine is cheaper than acquiring a bank loan
since no interest payment is involved and no collateral is needed. Moreover, retained profit
does not have to be repaid.
(214) 25. a) It might not have a guarantee for debt repayment (collateral) and since the business
is not yet established, it will not have financial credibility or record, making it more risky to
lend to.
b) Microfinance is a source of financial services for entrepreneurs and SME owners who lack
access to commercial bank loans. A small loan can be granted without requiring a security,
based on terms and conditions imposed by the lender.
(215) 26. a) The company could take an overdraft or use its retained profit if in cash form. It
can also
consider a short-term bank loan. The most suitable though would be an overdraft of $20,000
if retained profit is insufficient since the overdraft can be accessed and repaid quickly.
b) Company B could issue shares or stocks since it is already loaned out. The most suitable
would be share issue in case retained profit is insufficient.
c) The factors that might influence Company B’s choice are:
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- Shareholders expect dividends to be paid and ownership might change if many shareholders
are involved.
- The profitability, time, and ease of issuing shares
- The gearing ratio.
(216) 27. a) Venture capitalists, because it’s a new product that might succeed.
b) Bank loan, because building the plant has a specific cost and it might be costly.
c) Leasing, because it allows the company to use resources to increase the inventory, without
acquiring high costs.
(217) 28. a) a = 35 + 5 = 40
b = 160 - 110 = 50
b)
c) In the cash flow forecast, net cash flow increases when there is an increase in cash inflows
(i.e., Q4) and decreases when there is an increase in cash outflows (i.e., Q1, Q2, and Q3).
d) A business can operate for years without making a tangible net profit, given that it has
enough cash to continue its operations. Therefore, even though profit is essential, a business
cannot proceed its operations and meet its financial commitments without adequate cash
flows.
e) Yes, because large, well-established businesses, have already acquired a know-how in
managing risks related to cash flows while new businesses tend to suffer from over
expenditure. Therefore, a cash flow forecast could be more helpful to them in anticipating the
required amount of cash and avoiding the risk of failure.
(218) 29. No, because a decrease in share price means that the business is possibly losing
market value and profits are deteriorating. A decrease in dividends indicate that the business
is trying to save cash, most likely to solve its cash flow problems. In addition, a gearing ratio
of 60% is high indicating that the business is risky and heavily financed by external loans.
(219) 30. G To have a positive working capital, expand, overcome financial problems, and
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(222) 33. G Short-term finance must be paid back within one year and it is used for the
working capital. Long-term finance is required for investment in assets, mainly fixed assets
such as machines.
(223) 34. G
a) Mortgages: external
b) Trade credit: external
c) Retained profit: internal
d) Sale of assets: internal
e) Venture capitalists: external
(224) 35. G Microfinance assists small businesses or individuals who live below the poverty
line in developing countries so that they can improve the overall standard of living, since
commercial banks are reluctant to give them finance.
(225) 36. T
a) The two other possible sources to finance his business are: Bank loans and hire purchase.
b) Shareholders expect dividends to be paid.
(227) 38. T
a) Long-term finance refers to finance sources that are settled within a long period of time,
usually more than 1 year.
b) Long-term finance is required for fixed asset procurement (e.g., property, and
machinery). It is also applied to takeover bids and other forms of economic
expansion.
(228) 39. T The company can issue shares or sell its unused assets.
(229) 40. T a) Working capital is the amount of money required to accommodate the day-to-
day commercial operations, overheads, and transactions of an enterprise. The cash flow of a
business represents the forecasted inflow and outflow of money during a specific period of
time.
b) The balance sheet identifies the value of a firm’s assets, liabilities, and shareholders’ funds
at a specific time. The profit and loss statement measures the income and expenses of a
business, over a period of time.
c) Internal finance can be drawn from within the business itself (e.g., retained profit, sale of
assets, and owners’ savings). External finance is acquired from organizations or individuals
outside the business, such as commercial banks, shares, loans, and government subsidies.
d) Share capital is the amount of money generated from the sale of newly issued
shares.
Owner capital represents the value of capital owned by the owner.
(230) 41. T
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This might result in lower profits and higher prices for products. A supplier should locate
where these costs are low so that he can still generate some profit.
(232) 2. a) In bulk-increasing, the finished product acquires volume or weight during the
production processes (i.e., the end-product weighs more than the resources used). For
example, beverages (e.g., Coca- Cola) can be sold as products with metallic containers, which
adds to their weight. Alternatively, bulk-reducing companies consume mass resources but
produce smaller finished products. For example, a manufacturer of industrial copper will try
to locate near a copper mine because of the cost of transporting the unrefined copper.
b) Retailing business:
- Customer parking
- Access for delivery
- Shops near by
Manufacturing business:
- Personal preference of the owners
- External economies of scale
- Government influence
(233) 3. In my opinion, he should choose site A. First, site A is less expensive than site B by
$2,000, and since the manufacturer is labor intensive, it will more likely locate in Site A
where the unemployment rate is higher, and wages are lower than in Site B.
(234) 4. a) It is important because it will allow the business to obtain more customers, generate
within popular areas such as the city center to attract a variety of customers. The second
factor is, parking lots and spaces; large retail stores or shopping complexes have to provide
sufficient parking facilities for customers to easily access the food outlets. The third factor is,
the security issues of location since this company might open for extended hours, requiring
some measure of internal and external security.
(236) 6. It is due to improvements in delivery services and systems of telecommunication
which facilitated the transportation of products, and made the proximity to the markets less
significant.
(237) 7. A manufacturer located in a well-established location benefits from the external
economies of concentration. For example, suppliers in that location will be very competitive;
therefore a manufacturer can benefit from lower prices when dealing with them.
(238) 8. a) Firm A should be located near its customers because it offers services that require a
worker to be present at the customers’ house. Therefore a closer location allows it to cater to
customers’ needs quickly. Firm B offers services through the internet, therefore it does not
need to be located close to customers, as it has a wider market reach.
b) It is important because it allows the service provider to attract customers especially when
the service provided requires the presence of an employee (i.e., cleaning services) or includes
the sale of products (i.e., shopping malls).
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(239) 9.G Location affects the costs of production, the availability of an adequate supply of
employees, security, and convenience for customers. The right location will result in higher
sales.
(240) 10. G - Owners might prefer a place over another for personal reasons.
of resources, political and economic stability, new foreign and emerging markets overseas
and government incentives.
(243) 13. The country will benefit from Ford since unemployment levels might decrease
because Ford uses large scale production and develops new job opportunities. This will lead
to an increase in the country’s output of cars, and the introduction of new ideas and
production methods and techniques through the use of technology.
(244) 14. a) Adidas, Nestlé, and Sony
b) Because they operate in more than one country, across different time zones, through
different commercial laws, and with various systems of political ideology.
(245) 15. G - Consumers will have a wider variety.
output per week in China is greater than in Country B while demand and revenues have
decreased in Country B. Therefore by relocating to China, Hoodies can benefit from
economies of scale.
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Also significant are, the pool of skilled workers available in the market and trade restrictions
on imported ingredients. The higher the tax on imported goods, the more costly the
production of candies.
b) A government can encourage the owner of Candict to locate or relocate to specific
regions by providing fiscal incentives, or by giving him a subsidy in order to expand into
underdeveloped parts of the respective country since it is a labor-intensive company. The
government decision about restricting imports will also affect Candict negatively since most
resources are purchased from abroad.
(252) 22. a) Governments influence enterprise location to achieve the following fundamental
objectives: Control congestion in crowded areas, boost areas where unemployment is high,
and attract foreign firms to locate in the country.
b) When locating in a new country, two factors need to be considered. First, the economic
and political factors as an unstable economy or a corrupted government can lead a business to
relocate to more stable countries. International and national laws or regulations that govern
commerce. Often, international and national governments alter laws that affect commerce,
mostly due to competition.
(253) 23. a) Multinational companies are not always welcome by the host country, because,
MNCs could cause damage to the environment or the general public. In addition,
manufacturing enterprises are not allowed to locate in beautiful green areas; only farming is
permitted in these locations. MNCS might exploit the resources available in the country, pay
lower wages to workers and use the country’s resources to export more products to their
home country and increase profit. MNCs might also be blocked if they are monopolies or if
they threaten domestic firms.
b) The government should seek to attract multinational companies, especially if the economy
is not performing well. For instance, the country will benefit from a decrease in
unemployment levels because MNCs develop new job opportunities, contribute to an
increase in the country’s output of goods/ services, contribute to developing new ideas, and
introducing new production methods and techniques through the use of technology, increase
the country’s exports, contribute to higher government revenues, provide a wider choice to
citizen, improve the quality of human capital and invest in future economic plans. However,
MNCS might also harm the economy by using up its resources or exerting power
to influence the government. They might also threaten domestic firms.
(254) 24. G The government can give financial assistance in the form of subsidies, grants, and
easy term loans. It can also limit the restrictions imposed or reconsider taxes imposed.
(255) 25. T a) The exchange rate because of its continuous fluctuation. Trade barriers are also
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(256) 26. T a) The country will benefit from a decrease in the unemployment level, an
increase in the country’s output of goods/services, and higher government revenues.
b) The multinational might threaten domestic firms by either taking them over or
forcing them to go out of business. Moreover, most of the resources might be
exploited, the profits generated might be repatriated, and the large enterprise may
become powerful enough to influence the government, evade laws, avoid paying
taxes, and cause environmental damage.
c) The government already provided a grant to support the establishment of the
multinational because it is to be located in an area facing a run-down. This means the
economy is not doing well and local suppliers cannot cover the increase in demand.
Therefore, the government should allow the multinational to locate in the country to
increase job opportunities and the country’s output.
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- Higher employment.
- Stable prices.
- Stable balance of payments.
- Higher economic growth.
(259) 3. G Recession is marked with low employment and low output. As a result, the
companies sell less because consumers’ incomes decrease. Recession reduces the profits of
firms.
(260) 4. G
a) Recession: prices, employment, and output decrease. This leads to a drop in business
operations and profits and increases their chances of shutting down.
b) Recovery: the demand, employment and prices start to increase bringing along a
higher demand for a firm’s products and an increase in sales and profits
G If the government implement economic policies to reduce the unemployment
(261) 5.
rate, consumer demand increases, but so will prices and BOP deficit.
and hotels, and at the same time they will spend their money on domestic products. In turn,
production will increase, and the economy will grow.
b) When the level of employment is high, individuals earn wages and salaries. This means
they will be able to purchase the goods/services produced by firms. Consequently, profits
increase.
(264) 8. a) When the level of unemployment is high, wages are likely to go down because
unemployed people are willing to work for any wage given to them, and those employed will
accept lower wages to remain in their jobs. Thus, businesses
will benefit from lower labor costs. In addition, unemployed individuals do not earn wages
and salaries.
This means they will not be able to purchase the goods/services produced by firms.
Consequently, profits decrease.
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b) Loans become more expensive to finance or to obtain. Businesses, which are subject to a
variable interest rate, will have to pay a higher cost for the accumulated interest. This expense
eats into the profit margins.
c) When the economy grows, workers will be earning more. This results in a higher income
level (i.e., national income per head) and higher demand. Thus, the economic expansion
induces high profits creating new opportunities
for businesses, since they can expand due to the additional profits earned from high demand.
(265) 9. Due to the process of public tender (i.e., a project offered by governments to
companies), the construction and transportation industries benefit greatly from this annual
budget. Companies bid for projects (e.g., a new airport),
and the government extends the major part of the funds. Suppliers of resources benefit from
government spending on these projects. Also, when a government increases its expenditures,
the GDP per capita level rises along with the general
standard of living, and consumer demand. Thus, SMEs and large-scale enterprises increase
their output, employ more workers, and spend more money on R&D and expansion projects.
On the other hand, higher spending might lead to higher
inflation, and result in lower profits.
(266) 10. a) A decrease in GDP means the economy is not growing, and the resources are not
used efficiently. If the decrease lasts for a long period of time, the economy might enter a
recession.
b) The government should increase its expenditures, then the GDP per capita level will rise,
and more consumer demand will evolve. Thus, SMEs and large-scale enterprises increase
their output and employ more workers.
c) The effect of the decrease in GDP on a business producing necessities will be more or less
insignificant, because people will always demand necessities to survive. However, demand
for luxury goods will significantly decrease, reducing profits of luxury businesses.
(267) 11. a) Sam’s earnings in 2014 = (40,000 # 10%) + 40,000 = $44,000.
b) Real income = nominal income - inflation. Thus, his real income increased by 2% only
(10–8).
(268) 12. Profit margins and sales revenues increase, efficiency and productivity levels increase
products
more expensive. This encourages consumers to import cheaper products from foreign markets
and reduces the competitiveness of domestic exports. When the value of imports exceeds that
of exports, a trade deficit occurs.
(271) 15. When more people are employed, consumption increases, and commercial activity
and investment improve. Higher investment leads to higher output and GDP per capita,
leading to improvements in the standards of living.
(272) 16. a) Total imports = $4000 + $1,800 = $5,800 Total exports = $5,000
(273) 17. Direct taxes are directly levied on people’s incomes or firms’ profits, not on goods
and services. One example is income tax paid by an employee. Indirect taxes are imposed on
goods and services such as the VAT which is paid when
buying goods from a supermarket.
(274) 18. a) An income tax is a direct tax imposed on the gross income earned by a worker.
b) $1,200.
c) Peter’s disposable income = $12,000 - $1,200 = $10,800.
d) i. A high-income tax reduces the demand for products which leads to lower business sales
and profits.
ii. Lower demand for products reduces production and output which leads to higher
unemployment levels.
(275) 19. a) €1 = $2
the demand for exports increases while the demand for imports decreases, making domestic
firms better off. However, if the firms were importing their resources, they will become
worse off following their currency depreciation as their costs will increase.
(280) 24. G A policy based on the use of taxes and government spending to affect aggregate
aggregate demand, control inflation and generate revenue from taxes which will improve
infrastructure by developing road networks and raise the standard of living.
b) When the economy grows, workers might demand higher wages as the demand for
labor is derived from the higher demand. With these additional wages, employees can
demand more goods and services, generating high profits for companies. However,
economic growth might lead to inflation which will increase the cost of raw materials
and production for firms.
c) First, demand will decrease because disposable incomes decrease, reducing sales
and profits.
Second, higher taxes reduce retained profits, limiting the expansion of the business
and lowering share price and return on investment.
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(283) 27. T a) The demand for jewelry will decrease, because disposable income will
decrease and jewelry is a luxury good.
b) The demand for petrol will decrease but only slightly because petrol might be
needed as a necessity if there are no cheaper substitutes.
c) The demand for holidays will decrease, because holidays have a relatively elastic demand
and people cannot afford them when their incomes decrease
(284) 28. T a) From 2010 to 2011, interest rates strongly decreased from 9% to a lowest point
around 6%. However, from 2011 to 2013, interest rates increased progressively to
reach again 9% at the end of 2013.
b) From 2010 to 2013, the annual increase in average incomes increased progressively
from 2% to around 5%.
c) From 2010 to 2013, the rate of population growth highly increased from 3% to
10%.
d) From 2010 to 2011, the economic growth rate increased from 1% to 2%. However,
from mid-2011 to mid-2012, it remained stable and constant at 2%. And finally from
2012 to 2013, it increased from 2% to around 3%.
b) Foreign machines become cheaper and in greater demand; imports increase, and domestic
machines become more expensive and less competitive than foreign machines.
c) Country A will resort to trade restrictions to secure the domestic market. Thus, imports
from
country B will decrease, negatively affecting the balance of payments in country B (exports
of country B will decrease).
(286) 30. a) The company can access cheaper imported resources. This reduces costs and
increases profit margins for the firm allowing more investments and potential to expand.
b) The factors include the elimination of trade barriers and restrictions, economic union
between countries, improved and cheaper transportation and communication and
industrialization, as well as high technological advances.
(287) 31. G Advances in technology, communication, and transportation.
expensive foreign resources, improve consumer choice, and sell off surplus stock.
(290) 34. T a) The shop will benefit from higher profit margins and less risk of failure
because more tourists will be visiting the country which will gain more than one market.
b) The number of tourists from other EU countries will decrease, reducing demand.
Thus profits will decrease.
c) A fall in the Chinese Yuan means the Yuan has depreciated and is now less
expensive.
Therefore, tourists from China will find that their purchasing power in France has
decreased. As a result, coffee shop will face a decrease in demand and its profits will
decrease as French products become less competitive.
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T a) “Boom” is the result of fast economic growth. It is characterized by very high
(291) 35.
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disadvantage. Their aim is to increase consumer trust and loyalty to businesses that respect
these laws.
(294) 3. a) These practices include unjustified increases in retail prices, monopolization
• The Sale of Goods Act: makes it illegal for firms to solicit products that have defects.
• The Supply of Goods and Services Act: makes it illegal to provide a service without a
qualified staff.
• The Food Safety Act: governs food produced by enterprises for human consumption.
• Weights and Measures Act: represents the legal framework for commercial weights and
measurements.
• The Trade Description Act: prevents businesses from making false claims about the
performance of goods and services.
• The Consumer Protection from Unfair Trading Regulations: makes public
misidentification of property a crime.
• The Consumer Contracts (or the distance selling regulations): regulate online purchasing
and give consumers a period of time to return a product if it does not match the advertised
specifications.
(297) 6. T An enterprise becomes a social enterprise when its managers take decisions that
Section 2 The Laws that Protect Employees and their Effects on Business
(298) 7. a) Yes, a trade union is considered a pressure group because it influences enterprises to
c) At first, costs will increase as all the new requests are being implemented. But in the long
terms, this will lead to higher productivity and improved efficiency. The turnover of
employees decreases due to job satisfaction, and workers will feel protected under the law.
d) Yes, because in some countries these laws are not set, and employees work under harsh
conditions or get paid below the minimum wage (e.g., child labor and mine workers). Also,
by relocating, many employees will be made redundant which will affect labor supply and
reduce wage levels due to higher unemployment.
(299) 8. a) The government’s goal is to achieve a low level of unemployment, because when
the level of employment is high individuals earn wages and salaries. This means they will be
able to purchase the goods/services produced by firms. Consequently, GDP increases and the
economy will grow.
b) No, because large-scale enterprises have the option of relocating to a country with very
weak labor laws which will lead to fewer job opportunities and higher unemployment levels.
However, if tight laws are implemented, businesses are less likely to practice discrimination
and unfair dismissal. This increases employment.
(300) 9. a) The ad received a negative response from the audience because the choice of
employee was based on race and gender which is discriminating by nature. This ad is enough
for people to judge that the business does not respect or protect its employees.
b) The business will have a bad image in society and will face opposition from pressure
groups. This will create trade disputes and lower sales when consumers boycott its products.
(301) 10. a) Peter cares about his employees at work and takes measures to ensure their safety
(i.e., protect them from dangerous machinery.) However, John does not, because he only
focuses on increasing his profit margin.
b) Peter’s business will have a good reputation while John’s business will be penalized and
face problems with the government and trade unions.
(302) 11. The business avoids paying compensation to individuals and does not have to face
To ensure employees are protected by providing a healthy and safe work environment
To avoid discrimination and unfair dismissal
To restore equality between genders and races
To improve relationships with trade unions
(304) 13. G
Higher costs if the business has to change its operations to become a safer place to work
Lower disputes with trade unions and improve employees’ motivation
Lower labor turnover
Lower accidents and industrial disputes
Promote better image of the firm
Lower costs if employees become highly productive
laws. However, the impact of these laws will be heavier on the chemical manufacturer
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because he will be emitting more gazes and waste than a supermarket. This increases costs of
production and affects profits.
b) The chemical manufacturer will be affected more by these laws because production is
more hazardous and the products are dangerous to manipulate or mishandle.
(307) 16. a) The main aim of consumer protection laws is to prevent businesses from operating
1) Increase the use of scarce resources: low sustainable economic development and more
negative externalities.
2) Use renewable resources: better growth prospects, more sustainable development and
economic growth.
3) Develop new green products: lower negative externalities, better image.
G
(311) 20.
moral values.
b) A business can be ethical by not accepting bribes and discouraging child labor.
(313) 22. a) Pressure groups influence business activity by encouraging consumer boycotts
whereby consumers stop purchasing from the firm or by using bad publicity to negatively
influence the image of the business.
b) Short-term profits will fall because most ethical decisions require additional funding, such
as changing production methods.
(314) 23. a) A manager can take advantage of socioeconomic conditions to manipulate matters.
Also, he can force employees to work harder for less pay or use discrimination in the
workplace.
b) Governments set laws and systems to protect workers such as laws concerning industrial
relations, occupational health &
safety and employment standards. Also, the government can set a minimum wage and
antidiscrimination laws.
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(315) 24. G No monopolies will form, which will increase competition and give reasons for
firms to invest more and become more efficient. But this will prevent the firm from being
able to achieve economies of scale.
(316) 25. G Conserving resources or using recycling
This leads to higher costs, lowers sales, lower market shares, and lower competitive
advantage.
(318) 27. G They can set legal controls on pollution, quality standards, and waste.
They can encourage environmentally friendly firms through giving financial assistance,
exemptions from taxes and subsidies.
They can restrict the location of polluting firms to specific areas.
They can impose taxes on highly polluting firms.
(319) 28. G Benefits: lower disputes with pressure groups, lower government intervention in
business affairs, better image and reputation, higher employee satisfaction and retention
Drawbacks: higher costs if production needs to be changed.
(320) 29. T The government can impose barriers and restrictions on foreign companies. The
government limits the amount of imports (i.e., via tariffs and quotas) and acts to protect
domestic enterprises by granting them subsidies.
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