Exercise 4.

1
1. In Nigeria, firms vary in size from the smallest businesses up to very large enterprises.
(a) Distinguish between a sole proprietor and a partnership. [4]
(b) Explain why a business might wish to change from a partnership to a private limited
company.
[4]
(c) Describe the reasons why small firms are often successful in the retail trade in many
countries.
[5]
(d) Discuss to what extent a large firm is able to benefit from economies of scale in the television
manufacturing industry.
2. A large, capital-intensive German company producing electrical goods decided to establish a
factory in India.
(a) From the information given above, describe the type of business organisation that the
Germancompany is likely to be.
[4]
(b) Discuss what might be the advantages for a company of establishing a factory in another
country. [6]
(c) How might the establishment of the factory affect existing Indian companies and the Indian
economy?

Answer Exercise 4.1

1.(a) Sole proprietor:
a small, one person business
the person is his/her own boss
the owner is personally liable for any debts and has unlimited liability
the person receives all the profits.
Partnership:
individuals work together and share joint responsibility for any decisions
the partners usually have unlimited liability
more people to bring in skills and ideas
enhances ability to bring in more funds.
A maximum of 2 marks if only one type of business is covered. [4]
(b) Possible reasons:
can bring in more money by selling shares to friends and family
this will provide necessary finance for a business to expand
shareholders have limited liability
the company has a separate legal identity. [4]
(c) Possible reasons:
amount of capital to finance growth
organisation of the business, e.g. sole trader
personal choice/preferences of owner(s)
government regulation/assistance
customer preference for personal service
location in particular shopping areas, e.g. villages
convenience, e.g. extended opening hours.
Note that the question specifically refers to the retail trade; a maximum of 3 marks if no
reference to the retail trade.
[5]
(d) Economies of scale:
bulk buying
managerial
technical, e.g. specialisation, indivisibilities, linked processes
financial economies
risk bearing economies.
These are all internal economies of scale, but credit should be given to reference to possible
external economies, such as availability of skilled labour or existence of ancillary firms.
The question does refer to the extent so there could be a reference to possible
diseconomies of scale.
The question also refers explicitly to the television manufacturing industry; a maximum mark
of 5 if a general answer is given with no specific reference to television manufacturing.
[7]

2 (a) The type of business (in other words, large and capital-intensive) would suggest that it is
most likely to be a multinational public limited company having production units in other
countries, such as India, rather than a private limited company or a partnership.
Award up to two marks for describing a multinational and up to 2 marks for describing a
public limited company. [4]
(b) Possible advantages could include:
lower cost of labour
less powerful/non-existent trade unions
availability of skilled workers
availability of machinery
availability of raw materials
tax benefits
transport benefits
higher profits. [6]
(c) Effect on existing Indian companies:
a negative effect if they are in competition with the multinational company
there may be competition for a limited number of skilled workers
there could be a damaging effect on the profits of the Indian companies
but a positive effect if the Indian companies are suppliers of components or raw
materials
the Indian companies might be involved in the training of workers required by the
multinational company
there could, therefore, be a positive effect on the profits of the Indian companies.
Effect on the Indian economy:
a positive effect if employment is increased
local incomes could be increased
increase in standard of living/quality of life
government revenue from taxes could increase
a negative effect if much of the profit is repatriated to the home country
senior management may not be from local population
multinational company may quickly withdraw from the economy if economic conditions
worsen.
A maximum of 6 marks for either a one-sided answer or one which deals with only existing
Indian companies or the Indian economy.
A maximum of 8 marks if only explains positive effects or only explains negative effects.

Exercise 4.2
1. Define fixed cost and variable cost, giving one example of each. [4]
(b) Explain three factors of production that are involved in the operation of an airport. [6]
(c) A proposal has been put forward to build a new runway at an airport. Discuss the social costs
and benefits of such a decision.
2. A major computer company announced in 2003 that its profits had fallen.
(a) Explain what might cause profits to fall. [5]

Answer Exercise 4.2

1. A fixed or overhead cost is a cost of production which does not vary with changes in output
(1), such as the cost of fixed interest payments on loans (1).
A variable cost is a cost of production which does vary with changes in output (1), such as
the cost of raw materials (1). [4]
(b) Three from the following:
land, e.g. where the terminals and runways are constructed
labour, e.g. the skilled and unskilled labour involved in the various activities
capital, e.g. the equipment and machinery used at the airport
enterprise, e.g. the role of the entrepreneur in various airport operations.
Allow construction (as opposed to operation) of an airport.
A list of three factors of production can gain 1 mark.
A good explanation of these three factors, with no application to an airport, can get a
maximum of 5 marks.
2. Comment on changes in either revenue or costs or both. Could give an
example of why revenue or costs might change. [5]