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11 Growth and integration of firms

Chapter Eleven Growth and integration of firms


Self-assessment Questions

11.1(a) Internal growth, as the firm grows within its existing management structure.

11.1(b) External growth, as the expansion involves more than one firm.

11.2(a) Vertical forward integration

11.2(b) Lateral expansion

11.2(c) Internal growth/horizontal expansion

11.3 Vertical forward expansion. This is because real estate management belongs to a later
production stage than real estate development.

Multiple Choice Questions

1 B 2 A 3 A 4 C 5 B
6 B 7 D 8 B

3 The Hong Kong Bank still pays the same profits tax rate after the takeover. So (3) is not an
advantage.

4 Books and magazines are related products. Hence the combination belongs to lateral integration.

5 Vertical integration involves the expansion of a firm into different production stages of the same
product. It does not involve diversification of businesses. So (3) is not correct.

7 The setting up of financial companies can help promote the sale of housing units through
providing mortgage loans. So (2) is also correct.

Short Questions

9(a) Issuing shares and debentures

9(b)(i) Vertical backward integration, as hotels provide the services needed for the running of tour
groups.

Alternatively, it may be argued that this is a case of lateral integration, as hotel services and
tourism are related.

9(b)(ii) With an adequate supply of hotel rooms, the Morning Star Travel Co. Ltd. can make plans
for expansion more easily.

New Introductory Economics 3rd Edition 27 © Pearson Education Asia Limited 2003
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11 Growth and integration of firms

Structured Essay Question

10(a) Taking over a knitting factory – vertical backward integration

Merging with two boutiques – vertical forward integration

10(b)(i) Long run.

10(b)(ii) The advantages associated with economies of scale include:


(1) technical economies;
(2) managerial economies;
(3) financial economies;
(4) marketing economies;
(5) spreading risks;
(6) research and development economies.

New Introductory Economics 3rd Edition 28 © Pearson Education Asia Limited 2003
Suggested Solutions