IGCSE Economics Paper-2: Specimen Questions with Answers 51 - 52 of 100

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Passage

Setting prices of the product is difficult. Too high prices can lead to reduction in sales.

Question 51 (5 of 5 Based on Passage)

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Short Answer▾

Effect of sales volume increase or decrease on unit fixed cost.

Explanation

Profits of a firm are dependent on sales and cost incurred by a firm i.e.. fixed and variable cost. Variable cost is dependent on sales volume as they include direct raw materials and cost of labor. A business whether small or large incurs fixed cost even if the production has not started.

The Effect of Sales Volume on Unit Fixed Cost Is

  • Unit fixed cost are inversely proportional to sale which means cost per unit falls when sales increases.
  • In contrast to it, if the sales fall the fixed cost per unit increase as the cost is spread over few units.

The following effect can be explained with the help of an example:

If a bat manufacturer՚s total fixed cost is $ 1 million and annually it sells 500,000 bats, its fixed cost per unit will be $ 2. If a new partnership leads to increase in the sales volume to 550,000 the new per unit cost will be $ 1.82 on the other hand if the sales volume lowers to 450,000, the unit fixed cost will be $ 2.22.

Passage

The cost of production of a firm decreases as the business expands.

Question 52 (1 of 5 Based on Passage)

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Short Answer▾

Why some firms would benefit in small scale production

Explanation

Some firms benefit from small scale production because:

  • Time commitment: In a new business it may consume a lot of time of the entrepreneur in the initial stages as there are very few employees so all the decision has work and decision making must be done by the owner himself.
  • Risk: Risk cannot be eliminated from the business. Though a business structure may be designed to minimize risk and liabilities but still after some extent risk must be borne by the owner himself.
  • Uncertainty: external factors of the business are uncertain and cannot be predicted beforehand like- New competitors entering the market, change in the demand of the consumers. Even if the entrepreneur has planned everything still, he might not be able to foresee all the uncertainties.
  • Financial commitment: Many people starting their own business for their initial investment use their own personal savings. Commitment of savings may lead them with no money for their personal use. In some cases, the entrepreneur takes loan against some security which can be his house or any other personal asset.

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