4008AFE Exam/2223JANAPR– Answer Booklet

April 2023

Coventry University London

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4008AFE Examination – Answer Booklet

The Economic Environment of Business

Time allowed: 2 hours, Online
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Candidate Details

Student Name:
Student ID number:

Instructions to candidates

Answer all 10 multiple choice questions in Part A and all 4 questions in Part B.

Please download this exam paper along with the answer sheet, and type all
your answers in the Answer Booklet. You can also insert pictures of your
answers and workings in the file. You must make sure all pictures inserted in
the file are clearly readable.

Please do ensure that your submission is uploaded to Aula before the end of
the examination. You must submit only your Answer Booklet in Aula. You can
upload word documents or PDF files.

This is an open book examination.

NOTE:

1. The exam must be taken completely alone. Showing it or discussing it with

anyone would be breaching the regulations and may result in disciplinary
action.

2. You are allowed ONE attempt. Please ensure that you do not log off before
submitting your answers.
 4008AFE Exam/2223JANAPR– Answer Booklet

PART A – Answer all questions. Each question carries 3 marks. Total marks in
this section = 30 marks.

Question Answer
Q1 B

Q2 D

Q3 D

Q4 C

Q5 B

Q6 D

Q7 A

Q8 B

Q9 B

Q10 A

PART B - Answer all four questions from the list below. Provide as many
details as possible in your answer. Illustrate your points with diagrams where
asked and suitable. Total marks = 70.

QUESTION 1B:

a. (6 marks)
A natural monopoly occurs when a single firm can produce the entire output of the
market at a lower average cost than any combination of two or more smaller firms. In other
words, it is more efficient for one firm to produce the entire output of the market due to
economies of scale, where the per-unit cost of production decreases as the level of output
increases.
The size of a market plays a crucial role in determining whether an industry is a natural
monopoly. In a small market, it may be possible for several firms to compete and produce
 4008AFE Exam/2223JANAPR– Answer Booklet

goods and services at a lower cost than a single firm. However, as the size of the market
increases, the average cost of production decreases due to economies of scale. This means that
a single large firm can produce goods and services at a lower cost than several smaller firms,
resulting in a natural monopoly.
b. (7 marks)
Barriers to entry are obstacles or hindrances that prevent new firms from entering and
competing in a particular market. They make it difficult or expensive for new firms to enter a
market, limiting competition and allowing existing firms to maintain their market power and
profits.
The main barriers to entry include:
1. Economies of scale
2. Brand loyalty
3. Capital requirements.
4. Intellectual property
5. Government regulations
6. Access to distribution channels
7. Network effects
c. (7 marks)
An oligopolistic market structure is characterized by a small number of large firms
dominating the market, with each firm having a significant share of the market. The main
characteristics of an oligopoly are:
1. Interdependence
2. Barriers to entry
3. Differentiated products.
4. Non-price competition
5. Collusion
6. Price leadership
7. Strategic behaviour
QUESTION 2B:

a. (10 marks)
Start your answer here. Use as much space as you need.

Monetary policy is a government intervention in the economy that involves the control
of the money supply and interest rates to achieve macroeconomic goals such as low inflation,
 4008AFE Exam/2223JANAPR– Answer Booklet

stable economic growth, and low unemployment. It is implemented by the central bank of a
country, which is responsible for regulating the money supply, interest rates, and banking
system.
The main tools of monetary policy are:
1. Open market operations: This involves the buying or selling of government
securities in the open market to influence the level of reserves in the banking system
and the interest rates.
2. Reserve requirements: The central bank can also set reserve requirements, which
are the amount of funds that banks are required to hold in reserve against deposits.
By increasing or decreasing reserve requirements, the central bank can affect the
amount of money that banks can lend out and thus influence the money supply and
interest rates.
3. Discount rate: The discount rate is the interest rate at which banks can borrow
money from the central bank. By changing the discount rate, the central bank can
influence the cost of borrowing and thus affect the level of economic activity.
Expansionary monetary policy is a type of monetary policy aimed at increasing the
money supply and stimulating economic growth. This can be done through a combination of
the following measures:
1. Lowering interest rates: When the central bank lowers interest rates, it reduces the
cost of borrowing, making it easier for businesses and households to take out loans
to finance investments and consumption. This leads to increased economic activity
and stimulates economic growth.
2. Increasing the money supply: The central bank can also increase the money supply
by purchasing government securities in the open market, which injects cash into the
economy and stimulates economic activity.

b. (10 marks)
Fiscal policy is a government intervention in the economy that involves changes in
government spending and taxation to achieve macroeconomic goals such as stable economic
growth, low unemployment, and low inflation. It is implemented by the government of a
country, which is responsible for making decisions on government spending and taxation.
The main tools of fiscal policy are:
 4008AFE Exam/2223JANAPR– Answer Booklet

1. Government spending: The government can increase or decrease its spending on

goods and services, infrastructure, education, healthcare, and other public services
to influence the level of economic activity.
2. Taxation: The government can also change tax rates or the structure of the tax
system to influence disposable income, consumption, and investment.
Expansionary fiscal policy is a type of fiscal policy aimed at increasing the level of
economic activity and stimulating economic growth. This can be done through a combination
of the following measures:
1. Increased government spending: The government can increase its spending on
goods and services, infrastructure, and other public services to increase demand and
stimulate economic activity.
2. Tax cuts: The government can also reduce tax rates or provide tax rebates to
increase disposable income and encourage consumption and investment.

QUESTION 3B:
Quantity 0 1 2 3 4 5 6 7
Total Cost 8 9 10 11 13 19 27 37
Total Revenue 0 8 16 24 32 40 48 56
Profit -8 -1 6 13 19 21 21 19
Marginal Revenue - 8 8 8 8 8 8 8
Marginal Cost - 1 1 1 2 6 8 10

a. (10 marks)
The firm is maximising the profit when the Marginal cost is equal to the marginal
revenue of the firm. This is at the production quantity of 6 and 5 where the difference between
the marginal cost and marginal revenue is a small.

b. (5 marks)
The profit maximising quantity for the firm is 6 units.
 4008AFE Exam/2223JANAPR– Answer Booklet

QUESTION 4B:
a. (8 marks)
The labour force participation rate is the percentage of the working-age population that
is either employed or unemployed and actively seeking employment.
The labour force participation rate is calculated as follows:
Labour Force Participation Rate = (Labour Force / Working-Age Population) x 100
where, the Labour Force is the sum of employed and unemployed individuals, and the
Working-Age Population is the sum of employed, unemployed, and individuals not in the
labour force.
In this case, we have:
Labour Force Participation Rate = ((40,500,000 + 1,520,000) / (40,500,000 + 1,520,000
+ 15,000,000)) x 100 = (42,020,000 / 57,020,000) x 100 = 73.7%
Therefore, the labour force participation rate in the country is 73.7%.
The unemployment rate is the percentage of the labour force that is unemployed.
The unemployment rate is calculated as follows:
Unemployment Rate = (Unemployed / Labour Force) x 100
In this case, we have:
Unemployment Rate = (1,520,000 / (40,500,000 + 1,520,000)) x 100 = 3.6%
Therefore, the unemployment rate in the country is 3.6%.
b. (7 marks)
Frictional unemployment and structural unemployment are two types of unemployment
that can occur in an economy.
Frictional unemployment occurs when people are in the process of changing jobs or
entering the workforce for the first time, and there is a temporary delay in finding a new job.
This type of unemployment is usually short-term and is a natural part of a healthy and dynamic
labour market. Frictional unemployment can also occur due to seasonal factors, such as changes
in demand for certain types of labour during different times of the year.
On the other hand, structural unemployment occurs when there is a mismatch between
the skills and qualifications of workers and the available job opportunities. This can happen
when there is a shift in the economy towards industries or types of jobs that require different
skills than those possessed by workers who have lost their jobs. Structural unemployment is a
long-term problem that can persist even during periods of economic growth and low overall
unemployment rates.
 4008AFE Exam/2223JANAPR– Answer Booklet

END OF EXAM PAPER