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ANSWERS TO END-OF-CHAPTER QUESTIONS

1. e

2. d

3. c

4. d

Shareholders are the owners of corporations, but in most large corporations, the shareholders
tend to be so numerous and dispersed that they are not in a position to organize themselves so
as to exercise effective control of the corporation.

5. (a) Unlike manufacturing firms, service firms need to be located near their customers. This
dispersion of services militates in favour of large numbers of small firms. For example, your car
may have been manufactured in a huge plant thousands of miles from where you live, but the
gas and service that it needs are provided by small firms near your home. This is also an
opportunity to introduce the concept of economies of scale that comes up later in the text—
while large plants enjoy great cost advantages in many manufacturing industries, there are no
great economies of scale in having enormous facilities in the many service industries that are
labour-intensive.
(b) Some examples would be banking, airlines and communications. These service
industries require large amounts of capital equipment, which tends to result in enterprises that
are large and relatively few in number. In such service industries, economies of scale play an
important role. Also, in some service industries, technology plays a key role—in the case of
many routine operational aspects of an industry such as banking, traditional labour-intensive
production methods have been replaced by more capital-intensive methods.

6. It is logical to expect that small business will continue to be very important and may grow in
importance, as a provider of both services and employment. As will be seen later in the text, in a
highly-developed economy much emphasis is placed on services. Consumers with high living
standards demand many services, and most of the labour force is available to provide services,
because many goods are produced through capital-intensive production methods or offshore,
where labour is less costly. At least so far, there seems to be no end to the growth of the
number and the variety of services that have become a key part of the economy. Students with
a marketing bent will also recognize that in an economy with considerable number of wealthy
 consumers, there will always be a healthy market for a wide variety of “niche” goods and
services, many of which could be provided by small businesses.

7. Industrial concentration refers to the extent to which specific markets (eg – the market for
banking services) are dominated by a few sellers. Concentration is a matter of concern because
competition is essential if the market system is to benefit consumers, and when there are only a
few firms in an industry, there is a risk that they will get together and agree not to compete too
vigorously. Lack of competition would reduce both the effectiveness and the efficiency of the
industry, as firms will feel less pressure to offer improved products and/or services, and to
increase efficiency and reduce costs. The result would be lower-quality products and services at
higher prices.

8. Privatization refers to the sale of government enterprises to private interests (that is, they will
become owned by shareholders) that will operate them for a profit. Critics of government
enterprises believe that the profit motive will improve the performance of these privatized
enterprises by creating incentives to be both more efficient and more effective than they were
as government bureaucracies that could fall back on government for financial assistance if they
lost money. In some cases these privatized enterprises will face competition that will also push
them to be more effective and efficient.