New Effective Economics 4A

Explanations to the MCQ in the Assessment

6 Ownership, Expansion and Integration of Firms

Multiple-choice Questions (PP.178181)

Explanations
1. D
This is one reason to set up public enterprises.

2. C

3. A

4. D
A is incorrect. The company is a partnership, which is not a legal entity.
B is incorrect. The profits tax rate of a partnership is lower than that of a limited company.
C is incorrect. They have unlimited liability. If Cheung cannot pay his debt, Kwan has to
pay for him.

5. A
A public limited company can invite the public to subscribe to its shares, but a private
limited company cannot.

6. C
Shareholders contribute capital to the company and bear the risk of the business.
A and B are incorrect. They share the profit but do not manage the company.
D is incorrect. They enjoy limited liabilities.

7. D
Firm A:
A public limited company satisfies the three conditions of Firm A.
Firm A is not a private limited company because the ownership of a private limited
company is not freely transferable.
Firm A is not a partnership because the owners of a partnership do not enjoy limited
liabilities.

Firm B:
A partnership satisfies the three conditions of Firm B.
Firm B is not a limited company because the owners of a limited company enjoy limited
liabilities.
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Chapter 6 Ownership, Expansion and Integration of Firms Hong Kong Educational Publishing Co.
New Effective Economics 4A
Explanations to the MCQ in the Assessment

8. B
Firm A is a legal entity because it can continue to exist when its owners go bankrupt. (Firm
A is a private limited company.)
Firm B is not a legal entity because the company cannot continue when its owners go
bankrupt. (Firm B is a partnership)

9. C
Refer to Table 6.3 on p.162 of New Effective Economics 4A

10. D
Refer to Table 6.4 on p.165 of New Effective Economics 4A

11. A
A listed company can invite the public to subscribe to its shares and list its shares for
trading on the stock exchange. This helps the company to raise capital.

12. D
The shares of a listed company are freely transferable, but the shares of a private limited
company are not. The chance of being taken over by others decreases.

13. B
Refer to Table 6.4 on p.165 of New Effective Economics 4A

14. B
Refer to Table 6.3 on p.162 of New Effective Economics 4A

15. D
Shareholders are owners. The company does not incur any debt by issuing shares, but the
control of existing shareholders will be diluted.

16. C
X: The firm expands and produces related but not directly competing products.
Y: The firm expands to the next stage of production.

17. B.
The publishing house is expanding to the next stage of production

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Chapter 6 Ownership, Expansion and Integration of Firms Hong Kong Educational Publishing Co.
New Effective Economics 4A
Explanations to the MCQ in the Assessment

18. D
The phone manufacturer is expanding to the next stage of production

19. B

20. C
This is horizontal expansion. The firm is expanding the output in the same market instead
of diversifying its products.

21. B
By backward integration, a firm is merging with another firm that supplies the inputs or raw
materials.

- END -

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Chapter 6 Ownership, Expansion and Integration of Firms Hong Kong Educational Publishing Co.