Pearson Edexcel IAL Economics: Types, growth and objectives of businesses (YEC11) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (Issue 2, June 2018), section 3.3.1, items 1 to 3. This is Unit 3 content, which the specification labels an IAL compulsory unit (full International A Level only, not the International AS). All data, countries and firms are invented. Learn the content first from the study guide and revision notes. Tick progress on the course checklist and see the course hub.

Questions

1. State the type of organisation described in each case: (i) a national rail company owned by the government; (ii) a shop owned by its customers, each with one vote; (iii) a charity that reinvests all surplus from its shops; (iv) a new firm created and owned jointly by two manufacturers. [4]

2. Explain one advantage and one disadvantage of a worker co-operative compared with a private company owned by shareholders. [4]

3. Hillside Farms and a food processor in Country B form a joint venture to sell cheese abroad.

(a) Explain two reasons why they chose a joint venture. [4] (b) State one risk of the joint venture. [1]

4. Two dairies in Country B merge. The regional market is worth £120m. Valley Dairy sells £24m and Hillcrest sells £18m. Their distribution costs are £6.0m and £4.5m. After the merger, distribution costs are £8.4m.

(a) Calculate the market share of the merged firm. [2] (b) Calculate the saving in distribution costs as a percentage of the combined costs before the merger. [2] (c) Explain one way the merger could harm consumers. [2]

5. A furniture maker buys its timber supplier. It bought 40,000 boards a year at £12.50. The supplier’s cost per board is £9.80.

(a) Calculate the annual cost saving. [2] (b) Express the saving as a percentage of the previous spending. [1] (c) Explain one disadvantage of this type of integration. [3]

6. A skiwear maker earns profits of £9m, £1m and £4m over three years. After a takeover of a swimwear firm earning £2m, £8m and £5m, the groups’ results are combined.

(a) Calculate the combined profit in each year. [2] (b) Explain why a conglomerate merger can reduce risk. [3]

7. Explain two reasons why the owner of an independent bookshop in a market town might choose not to expand. [6]

8. A printing firm’s costs and revenues are shown (output in thousands, money in £000).

Output	Price	Total cost
1	90	60
2	80	80
3	70	102
4	60	126
5	50	152
6	40	180
7	30	210
8	20	242

Fixed cost is 40.

(a) Find the profit-maximising output and the maximum profit. [3] (b) Find the revenue-maximising output and the revenue. [2] (c) Find the output and price if the firm maximises sales volume without making a loss. [2] (d) The owners accept any profit of at least 60. State the range of outputs a satisficing manager might choose. [2]

9. A listed company in Country C pays its chief executive a bonus linked to sales growth. Explain the principal-agent problem and analyse how this bonus might affect the firm’s profit. Suggest one way to reduce the problem and one limitation. [8]

10. A large group in Country D splits into three independent firms. Explain two reasons for the demerger and one effect on workers. [6]

11. A large company in Country D takes over its largest rival. Evaluate whether consumers will benefit. [12]

Answers

1. (i) State-owned enterprise (public sector) [1]. (ii) Co-operative [1]. (iii) Not-for-profit organisation [1]. (iv) Joint venture [1]. [4] Examiner insight: One precise term per case is enough; a long description is unnecessary, and “private sector” alone is too vague for (ii) and (iv).

2. Advantage: workers share in decisions and rewards, which raises motivation and effort [1], so productivity may improve [1]. Disadvantage: decisions involve many members, so they are slow [1], and the firm may find it hard to raise outside finance without giving up control [1]. [4] Examiner insight: Each point scores best as a claim followed by a reason. A bare list such as “motivation, slow” gives you little to build on.

3. (a) Sharing costs and risks of selling abroad [1], which makes entry affordable for a small farm [1]. Combining expertise: the farm knows production and the processor knows distribution [1], giving better chances of success [1]. (b) Disagreement over control or sharing profits, or clashing cultures [1]. [5] Examiner insight: “Reasons” need to be applied to the firms named. Generic points that could describe any partnership gain less than ones that use the farm and processor.

4. (a) Shares: 24/120 = 20% and 18/120 = 15% [1]. Merged share = 35% [1]. (b) Saving = 6.0 + 4.5 − 8.4 = £2.1m [1]; 2.1/10.5 × 100 = 20% [1]. (c) Larger market share gives more market power [1], so the firm could raise price or reduce choice [1]. [6] Examiner insight: Show the saving in pounds before converting to a percentage, and divide by the figure the question names as the base.

5. (a) Old cost 40,000 × 12.50 = £500,000 [1]; new cost 40,000 × 9.80 = £392,000, so saving £108,000 [1]. (b) 108,000/500,000 = 21.6% [1]. (c) The in-house supplier faces no competition [1], so it may become inefficient [1], and the maker may lose the chance to switch to cheaper rivals [1]. [6] Examiner insight: A disadvantage is rewarded when it is developed through a chain of reasoning. Naming the disadvantage and stopping is not enough for a three-mark explanation.

6. (a) 9 + 2 = 11 and 1 + 8 = 9 [1]; 4 + 5 = 9. Combined profits are £11m, £9m, £9m [1]. (b) The two products sell in different markets [1], with a good year for one often matching a poor year for the other [1], so total profit varies less (the range falls from 8 and 6 to 2) [1]. [5] Examiner insight: Use the data given. Pointing to the narrower range of combined profit is stronger than a general claim about spreading risk.

7. First reason: the owner may value control and personal service [1], which expansion could dilute [1], so choose a smaller profit and more independence [1]. Second reason: the market is small, or finance is hard to obtain [1]; extra shops would not attract enough customers or a bank loan [1], so growth would not pay [1]. [6] Examiner insight: Give two clearly different reasons. Two versions of the same point, such as “small market” and “few customers”, are likely to count once.

8. (a) Profit = revenue − cost: 30, 80, 108, 114, 98, 60, 0, −82 for outputs 1 to 8 [1]. Maximum profit at output of 4 [1], profit £114k [1]. (b) Revenue is 90, 160, 210, 240, 250, 240, 210, 160 [1]; maximum at output 5, revenue £250k [1]. (c) Profit is zero at output 7 and negative at 8 [1], so output 7 at price £30 [1]. (d) Profit is at least 60 for outputs 2 to 6 [1]; a satisficing manager need not choose 4 and may stop anywhere in this range [1]. [9] Examiner insight: Show a profit or marginal column so the method is visible. Naming the right output with no working leaves nothing to reward if you slip.

9. The principal-agent problem arises when owners (principals) hire managers (agents) whose aims differ [1], helped by managers knowing more than owners [1]. A sales bonus rewards higher sales whether or not they are profitable [1], so the executive may push output past the profit-maximising level towards revenue or sales maximisation [1]. Extra units then cost more than the revenue they bring [1], so profit falls below its maximum [1]. Solution: link pay to profit or share price [1]; limitation: managers may then focus on short-term results or manipulate figures [1]. [8] Examiner insight: Link the cause to the consequence in the context given. Define the problem, then follow the bonus through to profit.

10. Reason one: diseconomies of scale [1], such as slow communication, raised average cost, which smaller firms avoid [1]. Reason two: separate firms can focus on core activities [1], and may be valued more highly by investors [1]. Workers: uncertainty and possible redundancies in new head offices [1], although smaller firms may offer closer management and clearer promotion paths [1]. [6] Examiner insight: Keep to the demerger. A reason for growth or merger scores nothing here.

11. This is a horizontal takeover [1]. Gain: economies of scale cut unit costs [1], and competition may force lower prices [1]. Larger profit may fund research and a wider range [1]. Harm: higher market share gives market power [1], so prices may rise [1]; fewer rivals reduce choice [1] and weaken the incentive to improve quality [1]. Evaluation: the result depends on how contestable the market is [1], on whether the regulator imposes conditions [1], and on whether cost savings exceed the price rise [1]. A judgement is supported by the evidence, for example that consumers benefit only if rivals or entry keep prices down [1]. [12] Examiner insight: Judgement needs a condition and a conclusion. Listing gains and harms with no weighing, however accurate, reads as description, so finish with a conditional judgement.

Where marks are usually lost

• Naming a type of organisation with a loose term such as “private sector” when a precise one is required.
• Writing advantages and disadvantages of co-operatives as lists with no reasoning.
• Dividing by the wrong base in percentage questions.
• Calculating market share from the wrong total.
• Naming a disadvantage of integration without developing it.
• Mixing up profit maximisation, revenue maximisation and sales maximisation rules.
• Giving two reasons that repeat the same idea.
• Forgetting to apply the answer to the firm in the question.
• Reaching no conclusion in an evaluation question.

Next steps

• Re-read the study guide and the revision notes.
• Return to the course hub and the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class: /trial/.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics, specification Issue 2, June 2018, Pearson Education Limited: Unit 3, section 3.3.1, items 1 to 3.