Chartered Institute of Management Accountants (CGMA) · Fundamentals of Business Economics
CIMA BA1 Microeconomic and organisational context of business: practice questions with answers
6 free exam-style questions on Microeconomic and organisational context of business for CIMA BA1 Fundamentals of Business Economics. Try each one, then open the answer to read the explanation. Fincora has 72 original questions on this syllabus area.
Question 1
Northvale City Council runs a road safety programme whose stated objective is to reduce road accidents near schools by 30% within three years. The council's auditors are assessing the extent to which the programme has achieved this objective. Which aspect of value for money are they assessing?
- A Efficiency
- B Economy
- C Equity
- D Effectiveness
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Answer: D. Not-for-profit and public sector organisations are usually assessed on value for money, often described by the 3Es:
- Economy: spending less (minimising the cost of inputs).
- Efficiency: spending well (maximising outputs per unit of input).
- Effectiveness: spending wisely (achieving the organisation's objectives).
Measuring progress against the 30% accident-reduction objective is a test of effectiveness.
Question 2
Coffee and tea are substitutes, and coffee is a normal good. Which of the following would cause the demand curve for coffee to shift to the right?
- A A rise in the price of tea
- B A fall in the price of coffee
- C A rise in the price of coffee beans paid by roasters
- D A fall in consumers' incomes
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Answer: A. A change in the product's own price causes a movement along the demand curve. The demand curve shifts when other conditions of demand change: prices of substitutes and complements, incomes, tastes, population, and expectations. A rise in the price of a substitute (tea) shifts demand for coffee to the right; changes in costs of production shift the supply curve instead.
Question 3
Other things being equal, which of the following would be most likely to increase the cost of equity of Ellery plc?
- A Investors come to regard Ellery's future profits and dividends as more uncertain than before
- B A general fall in interest rates on government bonds and bank deposits
- C Ellery's shares become easier to buy and sell after it moves to a larger stock exchange
- D A fall in the rate of inflation that investors expect over the next few years
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Answer: A. A company's cost of equity is the return its shareholders require, which is the minimum return the company must earn on their capital. It depends on:
- the general level of interest rates (returns available on low-risk alternatives such as government bonds), which reflects expected inflation
- the risk of the company's shares: the more uncertain its profits and dividends, the higher the premium investors require
- factors such as how easily the shares can be traded
A rise in perceived risk raises the cost of equity, which reduces the present value of expected dividends and therefore the share price.
Question 4
The weekly demand for Kirkby Ltd's portable speaker is Q = 9,000 - 150P, where Q is the number of units and P is the price in $. Kirkby currently charges $36. At what price would Kirkby's total revenue be maximised, and what should it do to its current price to increase revenue?
- A $30; it should cut its price, because demand is price inelastic at $36
- B $30; it should cut its price, because demand is price elastic at $36
- C $60; it should raise its price, because demand is price inelastic at $36
- D $36; it should keep its price unchanged, because demand is unit elastic at $36
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Answer: B. Total revenue = P x Q = P(9,000 - 150P). On a straight-line demand curve revenue is maximised at the midpoint of the curve, where PED = -1 (unit elastic):
- Demand reaches zero at P = 9,000 / 150 = $60, so the midpoint price is $30
- Revenue at $30 = 30 x 4,500 = $135,000
- Revenue at $36 = 36 x 3,600 = $129,600
At $36, PED = (change in Q / change in P) x P / Q = -150 x 36 / 3,600 = -1.5, so demand is elastic: a price cut raises quantity proportionately more than it lowers price, increasing revenue until the price reaches $30. Above the midpoint demand is elastic; below it demand is inelastic.
Question 5
The hairdressing industry in Lanmouth consists mainly of small, independent salons, even though a few national chains also operate in the area. Which of the following best explains why so many small salons are able to survive?
- A Economies of scale in hairdressing are small, and customers value the personal service of a small salon
- B High barriers to entry protect existing small salons from new competitors
- C Small salons can raise finance more cheaply than large chains, because lenders regard them as less risky
- D Small salons benefit from greater bulk-buying discounts on products than large chains
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Answer: A. Small firms survive alongside large ones when:
- economies of scale are limited, so the minimum efficient scale is small and large firms have little cost advantage (typical of personal services)
- the market is local or specialised (niche markets), so demand at any one location is small
- customers value personal service, flexibility and individual attention, which small owner-managed businesses provide well
- barriers to entry are low, so new small firms can start up easily
Large firms do gain financial and purchasing economies of scale, but in hairdressing these are a small part of total costs.
Question 6
In the market for electric bicycles, consumer demand increases because of rising fuel prices. At the same time, several new manufacturers enter the market, so supply also increases. What will be the effect on the equilibrium price and quantity?
- A Price and quantity will both rise
- B Price will fall and quantity will rise
- C Quantity will rise, but the effect on price cannot be determined without knowing the size of each shift
- D Price will rise, but the effect on quantity cannot be determined
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Answer: C. Consider each shift separately:
| Shift | Effect on price | Effect on quantity |
|---|---|---|
| Demand increases (right) | Up | Up |
| Supply increases (right) | Down | Up |
Both changes increase equilibrium quantity, so quantity rises. Their effects on price work in opposite directions, so the change in price is indeterminate: it depends on the relative sizes of the two shifts.
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