CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Exam-style questions and sample answers have been written by the author. In examinations, the way marks are awarded may
be different.

Workbook answers
Answers to questions that ask for ‘one or two’ points, reasons or impacts may contain more than the
required number of points, indicating that alternative responses exist that could be equally valid. The
suggested answers to questions that are testing the skills of analysis and evaluation, apart from the worked
examples and the ‘improve this answer’ examples, are in a ‘building block’ form. This means they provide
an outline of the key knowledge, application, analysis and evaluation skills required to help learners
construct a complete answer. For further details of the annotation used in some of the completed answers,
refer to the ‘How to use this book’ section.

Chapter 21 
Key skills exercises
1 Price elasticity of demand (PED) 5 percentage change in quantity demanded 4 percentage change
in price
2 For every 1% change in prices, quantity demanded changes by 2% but in the opposite way (i.e. if price
rises, demand falls).
3 This is a very inelastic PED. If the price is reduced, quantity demanded will only increase by 5% for
every 10% price reduction. Total revenue will fall.
4 Income elasticity of demand 5 percentage change in demand for the produce 4 percentage change in
consumer incomes.
5 For every 1% increase in promotion spending, demand increases by 2%.
6 It is an inferior product.
7 The scientific research and technical development of new products and processes.
8 An innovative product could be patented to give monopoly power; the USP of a new product might
allow higher prices to be charged.
9 No new invention/innovation is developed by the R&D department; competitors release a product
earlier that consumers prefer.
10 It uses the specialists within a business to make forecasts for the future.
11 The mean of time series data is calculated by dividing the moving total by the number of time periods.
12 It is based on past sales results and future sales might not follow the same trend; the available data
might be inadequate for a trend to be established.
13 WE. PED 5 percentage change in demand 4 percentage change in price
Percentage change in price 5 − 10% [( − 10 cents 4 $1) 3 100]
Percentage change in demand 5 20% [(300 4 1 500) 3 100]
PED 5 20 4 − 10 5 − 2
14 The result means that demand is relatively price elastic and, if the price was raised by 10%, demand
would fall by 20% (if all other factors remained constant).
15 10% change in price; 5% change in demand; PED 5 5 4 − 10 5 − 0.5
16 This means demand is relatively inelastic in response to a price change. An increase in prices could lead
to higher revenue.

1 Cambridge International AS & A Level Business – Stimpson © Cambridge University Press 2021
 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

17 WE. Income elasticity 5 percentage change in demand 4 percentage change in income

Percentage change in demand 5 (− 0.6m 4 12m) 3 100 5 − 5%
Percentage change in income 5 (− $200 4 $10 000) 3 100 5 − 2%
Income elasticity of demand for MI ice creams 5 − 5 4 − 2 5 2.5
18 This is high and positive, suggesting that this is a luxury product which will experience a substantial
increase in demand when consumers’ incomes rise.
19 Percentage change in demand 4 percentage change in promotion spending 5 20% 4 10% 5 2
20 This is above one and positive. When promotion spending increases by a given percentage, the demand
for this dessert increases at twice this rate.
21 Sales of existing products seem to be saturated; it opens up a new market opportunity through
product development.
22 Test marketing of Iced Desserts; forecasting for Ice Cream Cookies seemed to be based on the success
of previous products.
23 Outline: Learners’ answers will vary (e.g. price decisions using PED results; product decisions using
income elasticity results; promotion decisions using promotion elasticity). Examples in the context of
the case must be given for each way.
24 It helps with resource planning (e.g. workforce planning during the high seasons and ordering of materials
used in ice cream production); it helps determine whether to go ahead with new product development.
25 Outline: Analyse the benefits and uses of elasticity results in business decisions; assess the limitations
of the elasticity concept. An overall evaluation is needed: elasticity calculations are useful as a guide
but need constant updating and managers need to also consider other factors that impact on demand.
26 Outline: Benefits: maintains consumer interest; potential for new brands which might replace those
experiencing declining sales; if a USP is developed, this helps with differentiation in the mind of
consumers. Balanced against: costs of new product development; risks of failure; finance might be
better spent on promoting/developing existing products/brands. An overall conclusion is needed.
27 Outline: Define sales forecasting and explain two or three methods. Analyse how these could be applied
to MI and the benefits to MI of having sales forecasts (e.g. identifying seasonal demand patterns will
allow more accurate workforce planning and operations planning). Evaluate the reasons why sales
forecasting might be difficult/inaccurate. An overall conclusion is needed.

Exam-style questions
Decision-making questions
1 a i  X 5 (750 4 8) 5 93.75
ii  Y 5 (80 − 95.625) 5 215.625
Note that 750 in (i) is the eight-point moving total for quarter 2 in 2021 (see Table 21.4).
b $99.7m ($102m − $2.3m)
c See ‘Improve this answer’.
2 Outline: Define R&D. Analyse the data in Table 21.3. Assess whether it shows a close correlation
between R&D spending and successful innovative medicines. Analyse the benefits of successful new
innovative medicines. Analyse the reasons for and the costs resulting from the failure of R&D to
develop new medicines. An overall conclusion is needed: state clearly whether the business should or
should not invest in further R&D and justify your answer.

2 Cambridge International AS & A Level Business – Stimpson © Cambridge University Press 2021
 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Improve this answer

This is an improved answer for decision-making Q1c. The additional skills have been annotated.
Sales forecasts such as the moving average method can be useful. They tell a business what sales will be in
the future and this makes planning much easier. By knowing what sales will be, MDI will be able to make
sure that the factory is large enough to cope with increased demand for medicines [An]. It can employ
more workers if the sales forecasts show that demand is increasing. Sales forecasts can be a key element of
workforce planning and especially for MDI, which might need to recruit and train specialist workers who
understand scientific methods of planning [K/Ap/An].
Sales forecasts that provide statistical evidence of seasonal demand patterns, such as the moving average
method, will help MDI hold adequate inventory levels of certain medicines at certain times of the year
(e.g. in quarter 1). This could be very important for the health of the nation and MDI will suffer bad
publicity if it has not foreseen with some accuracy the likely seasonal demand for its medicines [Ap/E].
However, the time series analysis method of sales forecasting only uses past results so would be
inappropriate for any new medicines that MDI might be about to launch. In these cases, MDI would
have to do some market research among doctors to find out the likely demand for new medicines. Sales
forecasting based on time series cannot take into account changes in government policy towards health.
An unforeseen cutback in government spending on health and medicines would cause a fall in demand for
MDI’s products that would not have been forecast by the time series method [Ap/An+/E].
So some attempts at sales forecasting by MDI, including time series analysis, is essential but it will not
provide 100% accurate sales forecasts. Other methods might need to be used, such as market research, and
MDI would be advised to try to make its operations as flexible as possible to meet unforeseen changes in
demand for its medicines [E+].

3 Cambridge International AS & A Level Business – Stimpson © Cambridge University Press 2021