Cambridge IGCSE and O Level Economics

Chapter 21: Firms and production

Suggested answers to individual and group activities
Group activities
1 Capital intensive: a, d, e; labour intensive: b, c

Individual activities
No. of machines No. of workers Output per worker
(average product)
4 1 10
4 2 12
4 3 15
4 4 18
4 5 20
4 6 18
4 7 16

The most efficient combination of workers and machines is 4 machines and 5 workers.
2 a 
Rising living standards tend to increase demand for water significantly. More water is
demanded for a variety of purposes including washing, watering gardens, cleaning cars, filling 1
swimming pools, processing food and other industrial uses.
b As living standards in most countries should rise in the future, demand for water is likely to
increase, which will cause its price to rise as shown in the diagram below. Supply will extend
as water companies will have a financial incentive to collect more rain in reservoirs, dam more
rivers and desalinate sea water.

Price of
D1
water

D S

P1
P

D1
D
S
0 Q Q1 Quantity
of water

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Cambridge IGCSE and O Level Economics

3 a 
A piecework model is a method of paying workers on the basis of amount of output produced
by them.
b i It may increase output as workers will spend less time travelling to and from work.
Thus, they may start working earlier and finish later. However, there is some risk that,
without supervision, they may reduce their effort and output but a piecework model may
overcome this limitation.
ii Costs should be reduced as the firm will not need much space to accommodate workers.
Some rooms may be required for meetings and key staff but considerably less factory or
office space and less car parking space would be required. This saving should be greater
than any rise in communication costs, which, given advances in technology, should be low.

Suggested answers to multiple choice questions and

four-part question
Multiple choice questions
1 A
Agriculture and mining are in the primary sector and their employment fell from 14 m to 13 m.
Manufacturing is in the secondary sector and employment stayed constant at 20 m. Retailing
and education are in the tertiary sector and employment in these two industries rose from 15 m
to 17m.
2 A
Doctors and operating theatres are used together. They are not substitutes – an operating
theatre cannot be used without a doctor. A doctor is an example of labour and an operating
theatre is an example of capital.
2
3 A
A decrease in corporation tax would provide an incentive for firms to buy more capital goods.
They would know that they would be able to keep more of any profits made. B, C and D would
also be likely to reduce demand for capital goods. Less disposable income would be likely to
reduce demand for the capital goods. Higher interest rates would have the same effect besides
increasing the cost of investment. A rise in pessimism would be likely to make the entrepreneurs
expect a lower return from investment.
4 A
Average product per worker is total product divided by the number of workers. In this case,
300
it is .
25

Four-part question
a Investment is spending on capital goods.
b The production of cars may increase if there is a rise in demand for cars. In the short term, car
firms may make more cars by asking existing workers to work overtime. Working longer hours
may reduce output per worker hour as the workers may become tired and so may not be able to
put so much effort in their work. In the longer term, the car firms may employ more workers. If
these workers are less skilled than the original workers employed, labour productivity will fall.
c Car production has become more capital-intensive because advances in technology have
significantly increased the range of tasks that can be completed by machinery with the minimum
of human supervision. Capital equipment has increased the number of cars that can be produced
in a given time period and has reduced the cost of production. Relying more on capital equipment
has also improved the reliability of the cars produced by reducing human error. Lower costs of
production and higher revenue have encouraged car firms to spend more on capital goods.

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Cambridge IGCSE and O Level Economics

d Industries becoming more capital-intensive may increase unemployment in a country. The

capital goods may be a substitute for labour and so capital goods may replace some workers. A
number of these workers may lack geographical or occupational mobility. For example, making
more use of tractors and combine harvesters may reduce the number of farm workers. If these
workers cannot find jobs in other industries, they will stay unemployed.
There are a number of reasons, however, why more capital-intensive production may not
increase unemployment. One is that there will be an increase in demand for capital goods and for
the service of maintaining the capital goods. This will encourage the capital goods industries to
employ both more capital goods and labour.
Becoming more capital-intensive may make a range of industries more efficient. Lower costs of
production can enable the industries to lower their prices and so become more internationally
competitive. If industries can gain larger markets, their output will increase. This may mean that
while the proportion of capital increases relative to labour, more of both may be employed.
For example, an industry may have initially employed 50 000 workers and workers may have
accounted for 60% of the factors of production employed. Using more capital goods and
producing more may mean that workers now account for only 35% of the factors of production
employed but the number of workers employed may now be 60 000.
Over time, in most countries, industries have become more capital-intensive but employment
has actually increased.

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