LS1- Size and Types of Firms

Question 1

Reasons why firms seek growth

Answer 1

• costs may fall due to economies of scale
• profits will rise due to higher output
• increased market power
• diversification due to increased range of products
• managerial objectives such as manager bonuses

Question 2

Why firms choose to remain small

Answer 2

• worried about diseconomies of scale
• do not wish to face scrutiny from regulators
• owners do not want extra work and risks associated with expansion

Question 3

Why firms must remain small

Answer 3

• unable to finance expansion
• lacking human capital e.g. enterprise and other skills
• operate in a niche market
• lack resources to cope with regulators

Question 4

Private sector

Answer 4

Not owned by the government

Question 5

Public sector

Answer 5

State run companies

Question 6

Not for profit

Answer 6

Exist to provide services

Question 7

Principal-Agent problem

Answer 7

• divorce of ownership
• principal = shareholder/owner
• agent = in charge of running day to day business
• sometimes manager can behave in a way which conflicts with owner objectives, e.g. Antony Jenkins of Barclays in July 2015

Question 8

How much market share does a firm need to be considered a monopoly?

Answer 8

> =25%