3.1.2 How businesses grow Quiz: Pearson Edexcel Economics A, Unit 3

The 20 questions

1. Forward vertical integration involves a firm merging with or buying a business that is:

   • In an unrelated industry with no link to its production
   • Earlier in the supply chain, such as a supplier of raw materials
   • At the same stage of production as itself, such as a rival
   • Nearer the final consumer in the supply chain

2. Horizontal integration is best described as:

   • Merging with a competitor at the same stage of production
   • Growing internally by investing in new production capacity
   • Merging with a firm at a different stage of the same supply chain
   • Acquiring a firm in a completely unrelated market sector

3. Conglomerate integration refers to:

   • Merging with a direct competitor in the same market
   • Expanding production by reinvesting profits in existing plant
   • Merging with a firm in an entirely unrelated industry
   • Merging with a supplier of inputs used in production

4. Organic growth is best defined as growth through:

   • Demerger of divisions into separate companies
   • Government subsidies alone, with no internal investment
   • Internal investment and reinvested profits, such as opening new outlets
   • Takeover of rival firms in the same industry

5. Which is a constraint on business growth?

   • Access to finance
   • Lower average costs of production
   • Economies of scale
   • An increase in market share

6. A car manufacturer buys a tyre manufacturer. Which integration is this?

   • Backward vertical integration
   • Organic growth by opening a new car plant
   • Conglomerate integration into an unrelated sector
   • Horizontal integration with a rival car firm

7. A clothing brand buys a chain of retail shops that sell its products. Which integration is this?

   • Horizontal integration with a rival clothing brand
   • Backward vertical integration with a fabric supplier
   • Conglomerate integration into an unrelated business
   • Forward vertical integration

8. Two rival coffee shop chains merge. Which advantage is most likely?

   • No change at all in market share after the merger
   • Increased market share and greater bargaining power with suppliers
   • Automatic and total elimination of all competition in the market
   • A guaranteed fall in costs of production in every case

9. Which is a disadvantage of horizontal integration?

   • Lower market power with suppliers and customers
   • Loss of all market share to new entrants in the first year
   • Reduced access to suppliers of the key inputs the firm needs
   • Possible diseconomies of scale, culture clashes and scrutiny by competition authorities

10. A conglomerate firm grows by buying unrelated businesses. What is a potential advantage?

    • Spreading risk across unrelated markets
    • Achieving the same economies of scale as horizontal integration
    • Ensuring that the firm never faces any regulation at all
    • Guaranteeing that the firm avoids all cyclical downturns in the economy

11. A firm grows organically rather than by acquisition. What is a benefit of this approach?

    • It gains instant market share in every market it enters
    • It avoids all costs involved in expanding the firm's operations
    • It avoids paying a premium for another firm and may keep the existing culture
    • It eliminates all risk associated with expanding the business

12. A bakery buys a farm that supplies its wheat. What is the most likely benefit?

    • Greater access to wheat for the bakery's competitors nearby
    • Lower demand for bread from its customers in the local area
    • No need for any finance because the farm is paid for by the state
    • A secure supply and possible cost savings through control of inputs

13. Which statement about access to finance as a constraint on growth is most accurate?

    • Firms with limited finance may struggle to fund acquisitions or large investments, which slows growth
    • Finance only matters for not-for-profit organisations and not for firms
    • Finance has no effect on a firm's ability to grow in any market
    • All firms always have unlimited finance available for growth

14. Why can a niche product limit a firm's growth?

    • Small markets have no competition, so growth is not needed
    • Limited demand restricts how far output and sales can expand
    • Niche products always earn supernormal profit with no need to grow
    • Niche markets contain many firms competing on price

15. Evaluate horizontal integration in a market with only a few firms.

    • It always benefits consumers through lower prices in every market
    • It is always illegal in every market because it reduces the number of firms
    • It may increase market power and raise competition concerns, reducing consumer welfare unless efficiency gains are passed on
    • It has no effect on prices because the number of firms is fixed

16. A competition authority blocks a merger. Which reason is most likely?

    • The merger would lower all prices across the economy by definition
    • The merger involves only non-competing firms in different countries with no UK sales
    • The merger would increase competition in the market by adding a rival
    • The merger would substantially lessen competition, raising prices or reducing choice for consumers

17. Compare organic growth with acquisition. Which is the strongest evaluation?

    • Organic growth is slower and less risky but limited by finance, while acquisition is faster but brings integration costs
    • Acquisition is always cheaper and safer than organic growth in every case
    • Organic growth always fails because firms cannot grow internally at all
    • Both are identical in speed, cost and risk for every firm

18. A backward integration cuts costs but later the firm's costs rise. Which is the most likely reason?

    • Integration always cuts costs with no downside in any business
    • Diseconomies of scale only arise from changes in demand for the product
    • Managing a larger, more complex organisation can raise average costs as control becomes harder
    • The firm loses all its customers as soon as it integrates backwards

19. A firm has a small domestic market and limited finance but wants to grow. Which strategy is most realistic?

    • Demerging its core business in order to raise its overall size
    • Acquiring a large multinational outright with cash the firm does not have
    • Ignoring all regulation and merging with rivals in a single step
    • Gradual organic growth by expanding into export markets, funded partly by retained profits

20. Evaluate: 'Conglomerate integration always reduces risk.'

    • True, because conglomerates cannot fail in any market they enter
    • True, because a conglomerate always avoids every risk in every market
    • False, because conglomerates have no risk at all in any situation
    • Not always: diversification can reduce exposure to one market, but poor management and lack of synergy can destroy value

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