Firms: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
A Swedish furniture maker bought a Romanian firm that owned 83 000 hectares of trees. Which type of merger is this most likely to be?
Answer: C.
The correct answer is C: vertical backward.
Establish the supply chain. Trees supply the timber from which furniture is made, so a forest is at an earlier stage of production than a furniture factory. The Swedish furniture maker has bought a firm that owns 83,000 hectares of trees; that is, it has acquired its own supplier, which is backward vertical integration.
The motives are to secure the supply of a key raw material, control its cost and quality, insulate the business from timber price fluctuations, and capture the margin the timber supplier was earning.
Why the other options are wrong:
Establish the supply chain. Trees supply the timber from which furniture is made, so a forest is at an earlier stage of production than a furniture factory. The Swedish furniture maker has bought a firm that owns 83,000 hectares of trees; that is, it has acquired its own supplier, which is backward vertical integration.
The motives are to secure the supply of a key raw material, control its cost and quality, insulate the business from timber price fluctuations, and capture the margin the timber supplier was earning.
Why the other options are wrong:
- D, vertical forward, would mean moving downstream towards the customer, the furniture maker buying a chain of retail stores.
- B, horizontal, would mean acquiring a firm at the same stage of the same industry, such as another furniture manufacturer.
- A, diversification, means entering an unrelated product market to spread risk. Timber and furniture are directly connected as input and output, so this is not diversification.
Question 2
Which term describes the situation where the owner of a coffee plantation plans a merger with a chain of coffee shops?
Answer: D.
The correct answer is D: vertical merger forwards.
Establish the supply chain first. A coffee plantation grows the beans, the raw material at the start of the chain. A chain of coffee shops sells the finished drink to consumers, at the end of the chain. So the plantation owner is merging with a firm further along the chain, closer to the final customer, which is forward vertical integration.
The motive is to secure an outlet for the crop, capture the profit margin at the retail stage, and control how the product reaches consumers.
Why the other options are wrong:
Establish the supply chain first. A coffee plantation grows the beans, the raw material at the start of the chain. A chain of coffee shops sells the finished drink to consumers, at the end of the chain. So the plantation owner is merging with a firm further along the chain, closer to the final customer, which is forward vertical integration.
The motive is to secure an outlet for the crop, capture the profit margin at the retail stage, and control how the product reaches consumers.
Why the other options are wrong:
- C, vertical merger backwards, would mean moving upstream towards a supplier, the coffee shop chain buying the plantation, or the plantation buying a fertiliser producer. The direction is reversed.
- B, a horizontal merger, joins firms at the same stage of the same industry, two plantations, or two coffee shop chains. Here the two firms are at clearly different stages.
- A, a conglomerate merger, combines firms in unrelated industries. Coffee growing and coffee retailing are directly connected as supplier and seller.
Question 3
A computer chip manufacturer expands by taking over a computer chip designer. Of what is this an example?
Answer: A.
The correct answer is A: backward vertical integration.
Establish the supply chain. A chip designer produces the designs; a chip manufacturer uses those designs to make the physical chips. So the designer is at an earlier stage, supplying an input to the manufacturer. Acquiring it is moving upstream, which is backward vertical integration.
The motives are to secure access to designs, control their cost and exclusivity, protect intellectual property, and capture the margin the design firm was earning.
Why the other options are wrong:
Establish the supply chain. A chip designer produces the designs; a chip manufacturer uses those designs to make the physical chips. So the designer is at an earlier stage, supplying an input to the manufacturer. Acquiring it is moving upstream, which is backward vertical integration.
The motives are to secure access to designs, control their cost and exclusivity, protect intellectual property, and capture the margin the design firm was earning.
Why the other options are wrong:
- C, forward vertical integration, would mean moving downstream towards the customer, the chip manufacturer buying a computer assembler or a retailer.
- D, horizontal integration, would mean acquiring another chip manufacturer, at the same stage of the same industry.
- B, "diversifying integration", is not a standard term. Diversification means entering an unrelated product market, which chip design plainly is not relative to chip manufacture.
Question 4
A clothing manufacturer expands by taking over a clothing retailer. Which type of merger is this?
Answer: C.
The correct answer is C: forward vertical.
Establish the supply chain. A clothing manufacturer makes the garments; a clothing retailer sells them to the public. So the retailer is at a later stage, closer to the final consumer. Acquiring it is moving downstream, which is forward vertical integration.
The motives are to guarantee an outlet for the firm's output, capture the retail profit margin, control how the products are presented and priced, and gather information directly from customers.
Why the other options are wrong:
Establish the supply chain. A clothing manufacturer makes the garments; a clothing retailer sells them to the public. So the retailer is at a later stage, closer to the final consumer. Acquiring it is moving downstream, which is forward vertical integration.
The motives are to guarantee an outlet for the firm's output, capture the retail profit margin, control how the products are presented and priced, and gather information directly from customers.
Why the other options are wrong:
- A, backward vertical, would mean moving upstream towards suppliers, the manufacturer buying a textile mill or a cotton producer.
- D, horizontal, would mean acquiring another clothing manufacturer, at the same stage of the same industry.
- B, conglomerate, would mean acquiring a firm in an unrelated industry, which a clothing retailer plainly is not relative to a clothing manufacturer.
Question 5
A film production company purchases a group of cinemas. Of what is this an example?
Answer: C.
The correct answer is C: forward vertical integration.
Establish the supply chain. A film production company makes films; cinemas show them to the public. So cinemas are at a later stage, closer to the final consumer. Acquiring them is moving downstream, which is forward vertical integration.
The motives are to guarantee an outlet for the company's films, capture the profit margin at the exhibition stage, and control how and where its films are shown, including the ability to favour its own productions over rivals'.
Why the other options are wrong:
Establish the supply chain. A film production company makes films; cinemas show them to the public. So cinemas are at a later stage, closer to the final consumer. Acquiring them is moving downstream, which is forward vertical integration.
The motives are to guarantee an outlet for the company's films, capture the profit margin at the exhibition stage, and control how and where its films are shown, including the ability to favour its own productions over rivals'.
Why the other options are wrong:
- A, backward vertical integration, would mean moving upstream towards suppliers, buying a film studio's equipment maker, or a special effects house.
- D, horizontal integration, would mean acquiring another film production company, at the same stage of the same industry.
- B, a conglomerate merger, combines firms in unrelated industries. Film production and cinema exhibition are directly linked as producer and distributor.
What this practice covers
These questions are drawn from past Cambridge IGCSE papers and filtered to firms. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on firms, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Confusing horizontal with vertical integration.
- Getting backward and forward vertical the wrong way round.
- Saying growth is always beneficial, mention diseconomies of scale.
- Ignoring the reasons firms stay small, which is half the syllabus point.
- Using only employee numbers to measure size without noting its limits.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Firms revision notes.