Business behaviour and the labour market

Question 1

What is the principal-agent problem?

Answer 1

conflict between the objectives of the principals and those of the agents who take decisions on their behalf

Question 2

Who are the principals of a public limited company?

Answer 2

the shareholders

Question 3

What is organic growth?

Answer 3

when a firm grows internally by reinvesting profits or borrowing

Question 4

It what two ways can the principal-agent problem be overcome?

Answer 4

1. by ensuring owners have sufficient information to monitor managers
2. providing managers with incentives to take decisions that align with owners’ objectives

Question 5

Define a horizontal merger.

Answer 5

merger between two firms at same stage of production in same industry

Question 6

Define a vertical merger.

Answer 6

merger between two firms at different stages of production in same industry

Question 7

Define a conglomerate merger.

Answer 7

merger between two firms operating in different markets

Question 8

Define horizontal integration.

Answer 8

result of a horizontal merger

Question 9

Define backward integration.

Answer 9

process under which a firm merges with a firm that is involved in an earlier part of the production chain

Question 10

Define forward integration.

Answer 10

process under which a firm merges with a firm that is involved in a later part of the production chain

Question 11

Name two advantages of a horizontal merger

Answer 11

1. increased economies of scale
2. increased market share

Question 12

Name two advantages of a vertical merger

Answer 12

1. potential for rationalisation of production process
2. greater control over supply chain

Question 13

Name two advantages of a conglomerate merger

Answer 13

1. diversification (so less vulnerable to changes in demand, economy etc)
2. potential synergies in core business functions

Question 14

What is a transnational company?

Answer 14

a firm that conducts operations in a number of countries

Question 15

Name three things that can limit growth of a firm.

Answer 15

1. size of market
2. resources / ability to raise finance
3. regulation

Question 16

What positive impact might a demerger have?

Answer 16

1. allows renewed focus on core business
2. enable firm to remove loss-making sections

Question 17

What impact might a demerger have on consumers?

Answer 17

1. confusion
2. interruption of supply
3. price changes