O Level Business Studies (7115)
External influences on business activity Banker
24 questions · about 15% of the marks we indexed · examined in 9 of 9 sessions.
Practice questions
Original questions written by HomiLabs in the style of the exam, with answers and mark schemes. They are not
Cambridge past paper questions and have not been reviewed by Cambridge. Try each one before opening the answer.
Q1Environmental and ethical issues · Core · Paper 1 style · 4 marksMargalla Cement operates a large cement plant near a village in northern Punjab.
- (a) Define 'external cost'. [2]
- (b) Identify two external costs that Margalla Cement's plant might create for the village. [2]
Show answer
- (a) A cost of a business's activity that is paid by people or groups outside the business (society), not by the business itself.
1 mark: a cost resulting from the business's activity. 1 mark: borne by third parties/society, not the business.
- (b) Any two, e.g. dust/air pollution causing breathing problems; noise from machinery; heavy lorries damaging local roads and causing congestion; damage to farmland or water supplies; loss of natural landscape from quarrying.
1 mark each.
Pine View is a hotel in Murree that attracts many tourists every summer.
- (a) Define 'sustainable development'. [2]
- (b) Identify two ways Pine View could reduce its impact on the environment. [2]
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- (a) Development that meets the needs of people today without reducing the ability of future generations to meet their own needs.
1 mark: meeting present needs. 1 mark: without harming future generations' ability to meet theirs.
- (b) Any two, e.g. install solar panels / energy-saving lighting; reuse towels to save water and detergent; recycle waste; stop using single-use plastic; buy food from local suppliers; harvest rainwater.
1 mark each.
A pressure group is campaigning against a drinks company that sells water in single-use plastic bottles in Pakistan.
- (a) Define 'pressure group'. [2]
- (b) State two methods the pressure group could use to influence the drinks company. [2]
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- (a) An organisation of people with a common interest who try to influence the decisions of businesses or the government.
1 mark: group of people with a shared interest/cause. 1 mark: tries to influence business or government decisions.
- (b) Any two, e.g. organising a consumer boycott; protests or demonstrations; social media campaigns and bad publicity; petitions; lobbying the government to pass laws.
1 mark each.
The government has built a new metro bus line through the centre of Lahore.
- (a) Define 'external benefit'. [2]
- (b) Identify two external benefits of the new metro bus line. [2]
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- (a) A gain from an activity that is received by people or groups outside the organisation carrying out the activity.
1 mark: a benefit/gain from an activity. 1 mark: received by third parties/society.
- (b) Any two, e.g. less road congestion as people leave their cars; less air pollution; shorter journey times so workers reach jobs more easily; more customers for shops near stations; new jobs.
1 mark each.
Evergreen Oils produces palm oil on plantations in Malaysia. An environmental pressure group says the company is cutting down rainforest to plant more palm trees.
- (a) Identify two ways the government could control the environmental impact of Evergreen Oils. [2]
- (b) Explain two ways the pressure group's campaign could affect Evergreen Oils. [6]
Show answer
- (a) Any two, e.g. laws banning or limiting forest clearance; fines for illegal clearing; taxes on environmental damage; permits/licences for land use; subsidies for sustainable farming.
1 mark each.
- (b) e.g. 1) Boycott: food manufacturers and consumers may stop buying its palm oil, so sales and profit fall. 2) Bad publicity: the company's reputation is damaged, making it harder to attract investors or win contracts, and it may need to spend on public relations. 3) The company may change its methods, e.g. replanting forest, which raises costs but may later improve its image.
For each of the two points: 1 mark for identifying the point, 1 mark for applying it to the business, 1 mark for developing the consequence (max 3 per point).
The provincial government has introduced a pollution tax of PKR 1.50 per brick on brick kilns that still use old, smoky technology. Shah Bricks produces 600,000 bricks a month using the old technology.
- (a) Calculate the monthly pollution tax Shah Bricks must pay. Show your working. [2]
- (b) Explain two ways the pollution tax could affect Shah Bricks. [6]
Show answer
- (a) PKR 900,000
M1: 600,000 × 1.50. A1: PKR 900,000.
- (b) e.g. 1) Higher costs: the PKR 900,000 a month reduces profit unless it raises brick prices, which may lose customers to cleaner kilns. 2) Incentive to change: the owner may invest in cleaner (zig-zag) kiln technology to avoid the tax; this needs finance now but saves tax and improves its image. Other: may cut output or workers.
For each of the two points: 1 mark for identifying the point, 1 mark for applying it to the business, 1 mark for developing the consequence (max 3 per point).
Northway Fashion is a clothing retailer in the UK. A newspaper reports that one of its suppliers uses child labour. Another supplier, which follows strict labour standards, charges more.
- (a) Define 'ethical decision'. [2]
- (b) Explain two reasons why Northway Fashion might choose the more expensive supplier. [6]
Show answer
- (a) A decision based on what is morally right, rather than only on what makes the most profit.
1 mark: based on moral principles/doing what is right. 1 mark: may not maximise profit.
- (b) e.g. 1) Reputation: continuing with a supplier using child labour could lead to boycotts and lost sales, so paying more protects long-term revenue. 2) Marketing advantage: it can advertise ethically made clothes, attracting customers willing to pay higher prices. Other: avoids legal action; attracts staff and investors who value ethics.
For each of the two points: 1 mark for identifying the point, 1 mark for applying it to the business, 1 mark for developing the consequence (max 3 per point).
A government is deciding whether to build a new international airport outside a city. The following effects have been identified:1 Construction cost paid by the airport company2 Noise for families living nearby3 New jobs for local people in hotels and taxis4 Wages paid by the airport company to its own staff5 Loss of farmland and wildlife habitat6 Shorter journey times for business travellers from the whole region
- (a) Classify each of the six effects as a private cost, an external cost, or an external benefit. [4]
- (b) Explain why the government might approve the airport even though it creates external costs. [2]
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- (a) Private costs: 1 and 4. External costs: 2 and 5. External benefits: 3 and 6.
4 marks for all six correct; 3 marks for five; 2 marks for four; 1 mark for two or three.
- (b) The government considers the total social costs and benefits; if the external benefits (jobs, faster travel, growth) plus private benefits are greater than all the costs, society as a whole gains.
1 mark: compare social benefits with social costs. 1 mark: development, e.g. benefits outweigh costs so society gains.
Green Leaf Tea Company buys tea from farmers in Sri Lanka. It pays farmers above the market price and uses only recyclable packaging. Its shareholders want higher profits.
- (a) Outline one way ethical behaviour could increase Green Leaf's sales. [2]
- (b) Do you think acting ethically will reduce Green Leaf's profits? Justify your answer. [6]
Show answer
- (a) e.g. Customers who care about fair treatment of farmers may choose Green Leaf over rival brands, increasing sales and allowing a higher price.
1 mark for the point, 1 mark for development in context.
- (b) Reduce: paying above market prices and recyclable packaging raise costs; if prices cannot rise, profit margins fall; price-sensitive customers may buy cheaper tea. Not reduce: stronger brand image and loyalty; can charge a premium price; reliable supply from loyal farmers; avoids bad publicity. Judgement, e.g. in the short run profit may fall, but in the long run it may rise if customers value ethical tea; it depends on how many customers will pay more.
Up to 2 marks for knowledge/analysis of points for, up to 2 for points against, 2 marks for a justified judgement that explains why one side outweighs the other in this context.
Bean There is a chain of coffee shops in Karachi. It buys 20,000 kg of coffee beans a year from Supplier X at $4.50 per kg. Supplier X has been accused of paying workers very low wages. Supplier Y is a certified fair-trade supplier that charges 12% more per kg. Bean There's customers are mostly young professionals.
- (a) Should Bean There switch to Supplier Y? Justify your answer using suitable calculations. [12]
Show answer
- (a) Calculations: $10,800. Switch: protects reputation; fair-trade logo can be used in promotion and may attract young professionals who care about ethics; may justify slightly higher prices; avoids risk of boycott. Stay: extra $10,800 a year raises costs and reduces profit; customers may not notice or pay more; Supplier X may improve. Judgement, e.g. switch, because the extra cost is small compared with the risk to the brand and could be covered by a very small price rise per cup.
Calculations: 20,000 × 4.50 = $90,000. 12% × 90,000 = $10,800. Content: extra cost 12% × 20,000 × 4.50 = $10,800 a year; fair-trade logo in promotion, appeal to ethically minded young professionals, reputation and boycott risk, possible small price rise per cup; higher costs and lower profit, customers may not notice or pay more. Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Bean There, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Bean There, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks. Correct calculations count towards application and analysis; follow through an earlier calculation error.
Kohinoor Spinning Mills pays PKR 2.1 million a month for electricity from the national grid. It could install solar panels on its roof for PKR 18 million. The panels would reduce its electricity bill by PKR 450,000 a month. The mills would need a bank loan to buy the panels.
- (a) Should Kohinoor Spinning Mills install the solar panels? Justify your answer using suitable calculations. [12]
Show answer
- (a) Calculations: 40 months. For: saves PKR 5.4 m a year; cost recovered in 40 months (about 3 years 4 months) and panels last much longer; less pollution so better image with buyers; protects against rising grid prices and power cuts. Against: PKR 18 m loan means interest costs; savings may be less on cloudy days; money cannot be used for new machinery (opportunity cost). Judgement, e.g. install, because savings repay the cost in just over 3 years while panels last far longer, as long as loan interest is affordable.
Calculations: 18,000,000 ÷ 450,000. 40 months. Content: payback 18,000,000 ÷ 450,000 = 40 months; saving PKR 5.4 m a year; panels last much longer than the payback; protection from grid price rises and power cuts; image with buyers; loan interest; lower output on cloudy days; opportunity cost (machinery). Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Kohinoor Spinning Mills, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Kohinoor Spinning Mills, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks. Correct calculations count towards application and analysis; follow through an earlier calculation error.
AutoPak assembles cars in Karachi. The government and customers are increasingly concerned about the environment.
- (a) Identify two ways AutoPak could make its cars more environmentally friendly. [2]
- (b) Explain two environmental issues AutoPak faces. Which is likely to be the most important to AutoPak? Justify your answer. [6]
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- (a) Any two, e.g. produce hybrid or electric cars; improve fuel efficiency; use recycled materials; reduce weight; fit cleaner engines meeting emission standards.
1 mark each.
- (b) Air pollution from cars and the factory: stricter emission laws may force costly redesigns and fines. Waste and resource use: disposal of old parts and use of steel and plastics raises costs and attracts criticism. Other: energy use in the factory; pressure groups. Judgement, e.g. air pollution, because government emission rules affect whether AutoPak can legally sell its cars, so it directly affects sales.
Up to 2 marks for each issue (knowledge + analysis). 2 marks for a justified choice explaining why the other issue is less important.
Many Pakistani consumers now buy products made in China, the USA and Europe.
- (a) Define 'globalisation'. [2]
- (b) State two reasons for the growth of globalisation. [2]
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- (a) The increasing freedom of movement of goods, services, capital and people between countries, so that the world acts more like one market.
1 mark: growing trade/links between countries. 1 mark: movement of goods, capital or people / world becoming one market.
- (b) Any two, e.g. fewer trade barriers due to free trade agreements; cheaper and faster transport (container ships, air freight); improved communications and the internet; growth of multinational companies; industrialisation of developing countries.
1 mark each.
A Japanese motorcycle company has opened a factory in Pakistan.
- (a) Define 'multinational company'. [2]
- (b) State two benefits to Pakistan of the multinational opening the factory. [2]
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- (a) A business that has factories, production or service operations in more than one country.
1 mark: business operating/producing. 1 mark: in more than one country (not just selling there).
- (b) Any two, e.g. creates jobs; workers gain new skills; government receives more tax revenue; increases exports; brings new technology; more choice of products for consumers.
1 mark each.
The government of a country wants to protect its local shoe makers from cheap imported shoes.
- (a) Define 'import tariff'. [2]
- (b) Define 'import quota'. [2]
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- (a) A tax placed on goods brought into a country.
1 mark: tax. 1 mark: on imported goods.
- (b) A limit on the quantity (number or volume) of a good that can be imported into a country.
1 mark: limit/restriction. 1 mark: on the physical quantity of imports.
Sialkot Sports makes footballs that it exports to the USA. It charges PKR 3,360 per football. The exchange rate is $1 = PKR 280.
- (a) Calculate the price of one football in US dollars at this exchange rate. Show your working. [2]
- (b) The exchange rate changes to $1 = PKR 260 and Sialkot Sports keeps its price at PKR 3,360. Calculate the new price in US dollars, correct to 2 decimal places, and state whether the rupee has appreciated or depreciated. [2]
Show answer
- (a) $12.00
M1: 3,360 ÷ 280. A1: $12.
- (b) $12.92; the rupee has appreciated
B1: 3,360 ÷ 260 = $12.92. B1: appreciated (fewer rupees are needed to buy $1).
Pak Auto Assemblers in Karachi imports steel at $650 per tonne. The government has put a 15% tariff on imported steel.
- (a) Calculate the tariff paid on each tonne of imported steel. Show your working. [2]
- (b) Explain two ways the tariff could affect Pak Auto Assemblers. [6]
Show answer
- (a) $97.50 per tonne
M1: 15% × 650. A1: $97.50.
- (b) e.g. 1) Higher costs: steel costs $747.50 a tonne, raising the cost of each car; either price rises (fewer sales) or profit per car falls. 2) Change of supplier: it may buy steel from local mills instead, which could be cheaper now but may be lower quality or slower to deliver. Other: may need more working capital; competitiveness against imported cars may fall.
For each of the two points: 1 mark for identifying the point, 1 mark for applying it to the business, 1 mark for developing the consequence (max 3 per point).
Surgimed exports surgical instruments from Sialkot to the USA. A set of instruments is priced at PKR 8,700. The exchange rate changes from $1 = PKR 250 to $1 = PKR 290.
- (a) Calculate the price in US dollars of a set before and after the exchange rate change. Show your working. [2]
- (b) Explain two effects of the change in the exchange rate on Surgimed. [6]
Show answer
- (a) Before $34.80; after $30.00
B1: 8,700 ÷ 250 = $34.80. B1: 8,700 ÷ 290 = $30.00.
- (b) The rupee has depreciated. 1) Exports become cheaper for US buyers ($34.80 → $30.00), so Surgimed may sell more sets and gain market share. 2) Imported inputs such as special steel or machinery cost more in rupees, raising production costs and possibly reducing profit margins. Other: Surgimed could instead keep the dollar price and earn more rupees per set.
For each of the two points: 1 mark for identifying the point, 1 mark for applying it to the business, 1 mark for developing the consequence (max 3 per point).
A large Chinese electronics multinational plans to build a television factory in Kenya.
- (a) Identify two reasons why the multinational might want to produce in Kenya. [2]
- (b) Explain two possible disadvantages to Kenya of the multinational building the factory. [6]
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- (a) Any two, e.g. lower labour costs; to be closer to African markets and cut transport costs; to avoid import tariffs; government incentives/grants; access to raw materials.
1 mark each.
- (b) e.g. 1) Local TV makers may not be able to compete with the multinational's economies of scale and may close, so some local jobs are lost. 2) Profits may be sent back to China rather than reinvested in Kenya. Other: senior jobs filled by foreign managers; environmental damage; multinational may leave suddenly; may pressure the government for tax breaks.
For each of the two points: 1 mark for identifying the point, 1 mark for applying it to the business, 1 mark for developing the consequence (max 3 per point).
Chiniot Craft makes hand-carved wooden furniture and sells it in Pakistan. It is worried about globalisation.
- (a) Explain one threat and one opportunity that globalisation creates for Chiniot Craft. [6]
- (b) Outline one way Chiniot Craft could respond to more foreign competition. [2]
Show answer
- (a) Threat: cheaper factory-made furniture imported from abroad may take customers, so Chiniot Craft's sales and profit fall unless it cuts costs or stresses its hand-made quality. Opportunity: it can sell online to customers abroad, for example in the Gulf or UK where buyers value hand-carved furniture, increasing sales and allowing higher prices.
Threat: 1 identify, 1 apply, 1 develop. Opportunity: 1 identify, 1 apply, 1 develop. Other opportunities: import cheaper tools or materials; set up abroad.
- (b) e.g. focus on unique hand-carved designs and branding to differentiate from mass-produced imports.
1 mark for a valid response, 1 mark for brief development.
Several multinational fast-food and drinks companies have opened outlets in Pakistan over the last 20 years.
- (a) Outline one reason why a multinational company may be welcomed by the government of the host country. [2]
- (b) Do you think multinational companies are good for a country such as Pakistan? Justify your answer. [6]
Show answer
- (a) e.g. It creates jobs, which reduces unemployment and increases income tax and spending in the economy.
1 mark for the reason, 1 mark for development.
- (b) Good: jobs, training and new skills; tax revenue; new technology; investment in infrastructure; more choice and better quality for consumers; may increase exports. Bad: local firms may close; profits sent abroad; may use resources and cause pollution; may have power over government; senior jobs may go to foreigners. Judgement, e.g. good overall if the government regulates them and they use local suppliers, because the jobs and investment benefits are large; depends on how much profit stays in the country.
Up to 2 marks for knowledge/analysis of points for, up to 2 for points against, 2 marks for a justified judgement that explains why one side outweighs the other in this context.
Lahore Lights imports LED components from China. It must pay its Chinese supplier CNY 500,000 (Chinese yuan) for the next order. The current exchange rate is 1 CNY = PKR 39. Lahore Lights could pay now, or pay in three months' time when the order arrives. Its bank forecasts that the exchange rate in three months will be 1 CNY = PKR 41.50. Paying now would use most of the company's cash.
- (a) Should Lahore Lights pay its Chinese supplier now or in three months? Justify your answer using suitable calculations. [12]
Show answer
- (a) Calculations: PKR 1,250,000 more. Pay now: avoids the forecast extra PKR 1.25 m cost; certainty about cost for pricing. But uses most cash, so cash-flow problems (cannot pay wages or other suppliers); risk if goods arrive late or faulty. Pay later: keeps cash; forecast may be wrong and the rupee could strengthen. Judgement, e.g. pay now only if an overdraft can cover short-term needs, because the saving (about 6% of the order) is large; otherwise protect cash flow.
Calculations: now 500,000 × 39 = PKR 19.5 m; later 500,000 × 41.5 = PKR 20.75 m. difference PKR 1.25 m. Content: now PKR 19.5 m, later PKR 20.75 m at the forecast rate (PKR 1.25 m, about 6% more); certainty for pricing; paying now uses most cash — cash-flow risk, risk if goods are late or faulty; forecast may be wrong; overdraft option. Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Lahore Lights, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Lahore Lights, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks. Correct calculations count towards application and analysis; follow through an earlier calculation error.
Threadline, a European clothing company, wants to open a garment factory employing 800 workers in Asia. Appendix 2 shows information it has collected about two possible countries.Appendix 2Country A: average monthly wage $300; good roads and ports; workers experienced with high-quality fabrics; low tariffs on exports to Europe.Country B: average monthly wage $160; frequent power cuts; long delays at the port; government offers a 5-year tax holiday to new foreign factories.
- (a) Which country should Threadline choose for its new garment factory? Justify your answer using suitable calculations and Appendix 2. [12]
Show answer
- (a) Calculations: $1,344,000 a year (Country B is cheaper). Country B: labour about $1.34 m a year cheaper; 5-year tax holiday increases profit. But power cuts stop production and port delays mean late deliveries to European shops, which matters for fashion. Country A: higher wages but reliable infrastructure, skilled workers for quality, low export tariffs to Europe. Judgement, e.g. Country A if Threadline sells quality fashion where speed matters; Country B if it competes on low price and can buy generators.
Calculations: A: 800 × 300 × 12 = $2,880,000; B: 800 × 160 × 12 = $1,536,000. difference $1,344,000. Content: labour cost A $2.88 m, B $1.536 m a year (B $1,344,000 cheaper); B's 5-year tax holiday v power cuts and port delays (late deliveries to European shops); A's reliable infrastructure, skilled workers for quality fabrics, low export tariffs to Europe; fit with Threadline's market (quality fashion v low price). Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Threadline, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Threadline, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks. Correct calculations count towards application and analysis; follow through an earlier calculation error.
Economists say the country may enter a recession next year.
- (a) Define 'recession'. [2]
- (b) State two likely effects of a recession on businesses. [2]
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- (a) A period when a country's GDP (total output) falls, usually for six months or more.
1 mark: fall in GDP/output. 1 mark: for a period, e.g. two quarters / six months.
- (b) Any two, e.g. lower sales as incomes fall; lower profits; workers made redundant; some businesses close; less investment; more bad debts.
1 mark each.
A country's economy goes through the business cycle.
- (a) Identify the four stages of the business cycle. [4]
- (b) State two features of a boom. [2]
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- (a) Growth; boom; recession; slump (in order of the cycle: growth, boom, recession, slump, then growth again).
1 mark each for growth, boom, recession, slump.
- (b) Any two, e.g. high consumer spending; low unemployment; rising inflation/prices; skills shortages and rising wages; high business profits.
1 mark each.
Prime Autos is a car dealership in Lahore. It has a bank loan of PKR 5 million to finance its stock of cars. The central bank has raised interest rates, and the loan's interest rate rises from 18% to 22% per year.
- (a) Calculate the increase in Prime Autos' annual interest payments. Show your working. [2]
- (b) Explain two other ways the rise in interest rates could affect Prime Autos. [6]
Show answer
- (a) PKR 200,000 per year
M1: (22% − 18%) = 4% × 5,000,000. A1: PKR 200,000.
- (b) e.g. 1) Fewer car sales: many customers buy cars with loans/car financing; higher interest makes monthly payments larger, so demand falls. 2) Less expansion: borrowing to open a new showroom becomes more expensive, so Prime Autos may delay investment. Other: customers may save rather than spend.
For each of the two points: 1 mark for identifying the point, 1 mark for applying it to the business, 1 mark for developing the consequence (max 3 per point).
Tasty Karahi is a restaurant in Islamabad. The country has high inflation. The price Tasty Karahi pays for chicken has risen from PKR 1,250 per kg to PKR 1,400 per kg in one year.
- (a) Calculate the percentage increase in the price of chicken. Show your working. [2]
- (b) Explain two effects of high inflation on Tasty Karahi. [6]
Show answer
- (a) 12%
M1: (1,400 − 1,250) ÷ 1,250 × 100. A1: 12%.
- (b) e.g. 1) Rising costs: chicken is 12% dearer, so the cost of each karahi rises; if menu prices are not raised, profit margins fall. 2) Falling demand: customers' real incomes fall, so eating out (a non-essential) may be cut back and sales fall. Other: workers demand higher wages; frequent menu price changes cost money.
For each of the two points: 1 mark for identifying the point, 1 mark for applying it to the business, 1 mark for developing the consequence (max 3 per point).
Last year a country's GDP was $340 billion. This year it is $357 billion.
- (a) Calculate the percentage growth in GDP. Show your working. [2]
- (b) Identify two government economic objectives other than economic growth. [2]
- (c) Outline two benefits to a construction company of economic growth. [4]
Show answer
- (a) 5%
M1: (357 − 340) ÷ 340 × 100. A1: 5%.
- (b) Any two: low unemployment; low and stable inflation (price stability); balance of payments stability (exports and imports balanced).
1 mark each.
- (c) e.g. 1) Rising incomes mean more people can afford new houses, so the company gets more orders. 2) Government may receive more tax and spend more on roads and schools, giving the company more contracts.
For each: 1 mark for the benefit, 1 mark for linking it to a construction company.
The government has increased income tax rates. Luxe Motors sells expensive imported cars. Daily Needs is a grocery store selling rice, flour and cooking oil.
- (a) State two other ways the government could use fiscal policy to influence the economy. [2]
- (b) Do you think the increase in income tax will affect Luxe Motors more than Daily Needs? Justify your answer. [6]
Show answer
- (a) Any two, e.g. change sales tax/GST; change corporation tax on profits; change government spending (e.g. on infrastructure); change import duties.
1 mark each.
- (b) Higher income tax reduces disposable income. Luxe Motors sells luxury goods that people can delay buying, so demand is likely to fall significantly; buyers may switch to cheaper cars. Daily Needs sells necessities that people must still buy, so demand changes little, though customers may switch to cheaper brands. However, very rich customers of Luxe Motors may be little affected, while Daily Needs' low-income customers feel the tax more. Judgement, e.g. yes, Luxe Motors is affected more, because its products are not essential.
Up to 2 marks for knowledge/analysis of points for, up to 2 for points against, 2 marks for a justified judgement that explains why one side outweighs the other in this context.
Comfort Home Furniture sells sofas and beds in Karachi. Because of a recession, it expects sales to fall. Last year it sold 2,000 items at an average price of PKR 50,000. Managers are considering two options:Option 1 – cut prices by 10%; they forecast this would lead to sales of 2,150 items;Option 2 – keep prices the same and make 8 of its 40 staff redundant. Each of these staff costs PKR 60,000 per month.
- (a) Which option should Comfort Home Furniture choose? Justify your answer using suitable calculations. [12]
Show answer
- (a) Calculations: PKR 96,750,000. Option 1: revenue falls from PKR 100 m to PKR 96.75 m even though more items are sold, and the forecast may be optimistic in a recession; but it keeps staff and customers. Option 2: saves 8 × 60,000 × 12 = PKR 5.76 m a year; but customer service may fall, remaining staff demotivated, redundancy payments, and staff are lost for when the economy recovers. Note: revenue is not profit – selling 150 more items also adds to costs, so Option 1's effect on profit is worse than the PKR 3.25 m revenue fall suggests. Judgement, e.g. Option 2, because Option 1 reduces revenue by PKR 3.25 m while Option 2 cuts costs by PKR 5.76 m; or a justified alternative.
Calculations: new price 50,000 × 0.9 = PKR 45,000. 2,150 × 45,000 = PKR 96,750,000. Content: Option 1 revenue 2,150 × 45,000 = PKR 96.75 m v PKR 100 m now (fall of PKR 3.25 m, and extra items add costs); Option 2 saves 8 × 60,000 × 12 = PKR 5.76 m a year; reliability of the sales forecast in a recession; customer service, morale, redundancy pay, losing staff before recovery. Mark bands (12; knowledge 2, application 2, analysis 4, evaluation 4): Level 3 (9–12): developed analysis of both sides / all options applied to Comfort Home Furniture, using the data, and a justified decision that explains why the rejected option(s) are weaker. Level 2 (5–8): advantages and disadvantages analysed and applied to Comfort Home Furniture, with a decision that is only partly justified or one-sided. Level 1 (1–4): relevant knowledge with little application or analysis; a decision with no reasoning earns no evaluation marks. Correct calculations count towards application and analysis; follow through an earlier calculation error.
