HKDSE Economics in Life – Microeconomics 1

Chapter 3 Ownership of Firms

Exam Kit
Extra practice questions (Suggested answers)

Exam Kit
Chapter 3
Extra practice questions (Suggested answers)

Paper 1 Multiple-choice questions

1. B
2. C
3. C
4. D
5. B
6. C
7. B
8. D
9. A
10. B
11. D
12. A
13. B
14. C

Paper 2 Short questions and structured/essay-type questions

1.
(a) Differences between public enterprises and private enterprises:
- Public enterprises are owned by the government while private enterprises are
owned by private individuals.
- Public enterprises usually do not aim at profit maximisation while private
enterprises usually aim at profit maximisation.
- any reasonable answers
(Mark the FIRST TWO points only, 2 marks each)
(b) any example of public enterprise of Hong Kong, e.g. Census and Statistics
Department, Hong Kong Police Force and Hong Kong Monetary Authority
(Mark the FIRST point only, 1 mark)

2.
(a) Sole proprietorship. (1)
(b) “Unlimited liability” means the liability of the owner is not confined to his or her
amount of investment in the firm. (2)

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HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
Exam Kit
Extra practice questions (Suggested answers)

(c) Features:
- not a legal entity
- limited continuity
- simple legal set-up procedure
- lower profits tax rate than limited company
- do not need to disclose its accounting information to the public
- closer relationships with employees and customers
- limited sources of capital
- prompt decision-making
- any reasonable answers
(Mark the FIRST TWO points only, 1 mark each)

3.
(a) Advantages:
- The restaurant has wider sources of capital.
- Mr. Chan and his friend can share their own skills and expertise, the overall
productivity of the restaurant can be higher.
- any reasonable answer
(Mark the FIRST point only, 2 marks)
Disadvantages:
- It takes time to reach a consensus if there is a divergence of views between Mr.
Chan and his friend.
- Mr. Chan and his friend are responsible for the outcome of any wrong
decisions made by any of them.
- any reasonable answer
(Mark the FIRST point only, 2 marks)
(b) No, this is because (1)
the continuity of a partnership depends on the lifespan of its partners. If a partner
dies, goes bankrupt or withdraws from the partnership, the partnership has to be
dissolved. (1)

4.
(a) The model shop was not a legal entity; it becomes a legal entity after turning into
a private limited company. (2)
(b) The model shop has wider sources of capital. After turning into a private limited
company, it can issue shares and bonds to raise capital. (2)
(c) Kelvin and Jason bore unlimited liability. After turning the model shop into a
private limited company, they enjoy limited liability. (2)

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HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
Exam Kit
Extra practice questions (Suggested answers)

5.
(a) Public limited company/Listed company. (1)
(b) Features:
- at least 1 with no upper limit on the number of owners
- a legal entity
- limited liability
- lasting continuity
- separation of ownership and management
- higher profits tax rate than sole proprietorship and partnership
- more complicated set-up procedure than sole proprietorship and partnership
- can raise capital by issuing shares and bonds to the public
- ownership is freely transferable
- need to disclose its accounting information to the public
- any reasonable answers
(Mark the FIRST THREE points only, 1 mark each)

6.
(a) Firm A: private limited company (1)
Firm B: partnership (1)
(b) Other features of a private limited company:
- a legal entity
- limited liability
- separation of ownership and management
- higher profits tax rate than sole proprietorship and partnership
- more complicated set-up procedure than sole proprietorship and partnership
- ownership can only be transferred with the consent of other shareholders
- need to disclose its accounting information to its shareholders only
- any reasonable answers
(Mark the FIRST TWO points only, 1 mark each)

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HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
Exam Kit
Extra practice questions (Suggested answers)

Other features of a partnership:

- not a legal entity
- unlimited liability
- collective responsibility
- prior agreement is required for the admission and withdrawal of partners
- simple legal set-up procedure
- lower profits tax rate than limited company
- need to disclose its accounting information to the partners only
- any reasonable answers
(Mark the FIRST TWO points only, 1 mark each)

7.
Advantages:
- The existing shareholders’ control over the company will not be diluted.
- This will not increase the risk for the company of being taken over.
- any reasonable answer
(Mark the FIRST point only, 2 marks)
Disadvantages:
- Regardless of whether the company turns a profit, it is obliged to pay a fixed rate of
interest to bondholders.
- The company has an obligation to redeem the bonds from the bondholders.
- any reasonable answer
(Mark the FIRST point only, 2 marks)

8.
(a) Ordinary shares. (1)
Shareholders are owners of the company and they have voting rights in the
annual general meeting. (1)
(b) Bonds. (1)
The rate of return from bonds is more certain as bonds bear a fixed rate of
interest irrespective of whether the company makes a profit or not. (1)

9.
(a) Private limited company. (1)
(b) No, their liability is confined to their amount of investment in the restaurant. (2)

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HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
Exam Kit
Extra practice questions (Suggested answers)

(c) (i) A private limited company needs to disclose its accounting information to its
shareholders only while a public limited company needs to disclose its
accounting information to the public. (2)
(ii) A private limited company cannot issue shares and bonds to the public while
a public limited company can issue shares and bonds to the public and it can
be listed on the stock exchange. (2)
(d) (i) Ordinary shares. (1)
The company has no obligation to pay a dividend to shareholders even when it
turns a profit. Thus, the company has no interest burden. (1)
(ii) Disadvantages:
- Existing shareholders’ control over the company is diluted.
- The risk of being taken over by others increases.
- any reasonable answer
(Mark the FIRST point only, 2 marks)

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