CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded may
be different.

Coursebook answers
Most of the answers are in ‘outline’ form indicating the appropriate points and skills that learners need
to include in their answers. They provide the necessary guidance to allow learners to develop and extend
the points for a fuller answer that contains the relevant skills. In many instances, there may be other valid
approaches to answering the question.

Chapter 21
Business in context
Learners’ discussion might include:
Why is it important for businesses to develop new products?
• To gain a competitive edge to be able to compete with competitors.
• To replace products nearing the end of their life cycle.
• To increase sales and meet customer needs.
• To enter new markets.
The importance of protecting a new development with a patent:
• R&D is expensive, so a patent gives protection from other firms copying the idea. If copied, the
business loses its competitive advantage.
• It enables the business to recoup the cost of investment. Demand will be more price inelastic if a
product has a USP.

Activities
Activity 21.1
1 Percentage change in quantity = (200 − 300) ÷ 300 × 100 = −33.3%
Percentage change in price = (5 − 4) ÷ 4 × 100 = 25%
PED = percentage change in quantity ÷ percentage change in price = −33.3 ÷ 25 = −1.33
2 Product B is price elastic in demand for the price change of $4 to $5. Demand is responsive to a change
in price. The change in price leads to a more than proportionate reduction in demand. Revenue will fall
as a consequence of the price change. Revenue falls from $1 200 to $1 000 per week.

Activity 21.2
1 Learners’ answers might include:
• Price elasticity of demand measures the responsiveness of quantity demanded to a change in price.
PED = percentage change in quantity ÷ percentage change in price.
• The demand for Product A is price elastic. Demand is sensitive to a change in price.
• The demand for Product B is price inelastic. Demand is not sensitive to a change in price.
• The demand for Product C has unit price elasticity. A change in price causes a proportionate
change in quantity demanded.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

2 Demand for Product A will fall by 30%. Sales revenue will fall.
Demand for Product B will fall by 5%. Sales revenue will increase.
Demand for Product C will fall by 10%. Sales revenue will not change.

Activity 21.3
1 Percentage change in quantity = 0.15m ÷ 1.5m × 100 = 10%
Percentage change in price = (1.20 − 1.50) ÷ 1.50 × 100 = −20%
PED = percentage change in quantity ÷ percentage change in price = 10 ÷ −20 = −0.5
Demand is price inelastic and is not responsive to a change in price. The price decrease leads to a less
than proportionate change in demand.
2 Revenue = price × quantity
Revenue before the price decrease = 1.5m × 1.50 = $2.25m
Revenue after the price decrease = 1.65m × 1.2 = $1.98m
Revenue fell by $270 000 as a result of the price decrease. This is because demand is price inelastic and
the price decrease led to a less than proportionate increase in demand.
3 Learners’ answers might include:
• Competitor newspapers may have reduced their prices in response to the price cut at the Daily Times.
• The price cut may have attracted new readers to try the Daily Times but these customers may have
found that the paper did not meet their requirements. After a few weeks, the new customers would
start to purchase their original daily newspaper once again.
4 Learners’ answers might include:
• As demand appears to be price inelastic, it would be unwise to cut price further. A further price
cut would lead to a further reduction in revenue.
• It could start a price war with competitors. This would be damaging to the revenue of the Daily
Times. The financial strength of the Daily Times in relation to competitors will determine whether
or not it can destroy competitor titles through aggressive pricing policies.
• The Daily Times should conduct market research to identify customer needs. The content of
the newspaper may need to change to reflect the needs of readers. This response will be more
time-consuming to implement.
• The Daily Times may be in the decline phase of its product life cycle. There may be a need for
suitable extension strategies, e.g. a redesign of the newspaper to revitalise its image. This may be
expensive and any redesign should be supported by appropriate market research.
• Promotional activity could be used to boost sales, e.g. competitions may be run. These may have a
beneficial short-term impact but are they likely to stop the long-term decline in sales?
Evaluation might consider the cost of different strategies and the immediacy of their impact on sales.

Activity 21.4
1 Promotional spending elasticity of demand = percentage change in quantity ÷ percentage change
in price
Technical toys = 12 ÷ 10 = 1.2
Games and puzzles = 6 ÷ 10 = 0.6
2 Forecast economic growth of 6% could result in an increase in household income. If incomes rise,
that should benefit sales of technical toys more than games and puzzles, as demand for technical toys
is more income elastic. A 6% increase in income would increase sales of technical toys by 7.2%, other
things being equal.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Technical toys also have a higher promotional spending elasticity of demand; demand is more
responsive to a change in promotional spending for technical toys than for games and puzzles.
Therefore, if the marketing manager wants to increase revenue, it would be better to focus the
promotional budget on technical toys. However, the marketing manager should also consider the
relative size of each market. For example, if the sales of games and puzzles are much higher than
technical toys, a small percentage increase in sales of games may be much greater in dollar terms
than a larger percentage increase in sales of technical toys.
Evaluation could include a recognition that the objectives of the business will also be important in
determining the allocation of promotional spending. In addition, sales performance must be measured
regularly to recalculate elasticity results, which can change with changes in external factors.

Activity 21.5
Learners’ own answers.

Activity 21.6
1 Learners’ answers might include:
• Economic problems undermined demand within this segment of the drinks market. Consumers
will have traded down from the more expensive smoothies to regular juice drinks.
• It is a very competitive market with well-established brands such as Innocent. It was therefore
difficult for Nestlé’s new product to build sufficient sales.
• Nestlé is a large corporation and this might make its researchers more distant from the market.
Innocent is a much smaller organisation and therefore closer to its customers and consumers.
• Packaging was not appropriate. The lack of trial-sized bottles could have deterred consumers from
trying the drink.
2 Learners’ answers might include:
• New product development can give a competitive advantage. There are many examples of
successful and profitable developments, e.g. instant coffee.
• It may differentiate products from those of competitors and therefore gain greater control
over pricing.
• New ideas can add value.
• Food preferences change over time. Firms need to develop new products to satisfy consumer desire
for trying new foods.
• Existing products may be in the saturation phase of the product life cycle. Nestlé must maintain
a balanced product portfolio so that as old products enter decline there are new products in the
growth phase.
3 Learners’ answers might include:
• Market research to ensure that products being developed will meet customer expectations.
Products are more likely to succeed if they coincide with consumer trends, e.g. natural, healthy
products that consumers are demanding. Nestlé is aiming to improve its innovation by using small
innovation units that have greater independence from the central organisation. This gives the units
greater freedom over what they innovate.
• Test marketing to evaluate the product before a national launch. This gives an opportunity to
assess customer reaction to the product and make suitable changes.
• Appropriate marketing mix including price and promotion. New products may need support from
extensive promotion to raise customer awareness. A sufficient marketing budget will be needed.
• Evaluation could include a discussion of the nature of the market the business operates in. The
faster this market is changing and the more competitors there are, the more likely new products
will not succeed in meeting sales targets.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

Activity 21.7
1 Learners’ answers might include:
• The government has directly contributed $15m toward the $200m cost of the R&D. This is 7.5%
of the total cost. It is a subsidy and significantly reduces the cost of the research to Airbus.
• The government provides legal security to Airbus through the patent system. This will protect
Airbus’s investment as it will prevent other firms copying the design.
2 Learners’ answers might include:
• To protect engineering and scientific jobs in Wales (an area of relative deprivation in the UK).
Without the subsidy, Airbus may not undertake as much research.
• Protecting engineering and scientific jobs will ensure that the UK remains at the forefront of
technological change.
• To improve the competitiveness of Airbus in the airline market. The R&D will help win contracts
to supply aircraft to airlines around the world. This will generate export earnings for the UK and
help protect the jobs of production workers at Airbus factories in the UK.
• The development of new materials may benefit other industries. Although new materials will be
patented, other firms will be able to pay royalties to Airbus for their use.
• The aircraft industry may be viewed as a strategic industry within the UK and of national importance.
3 Successful R&D will create innovative products that give businesses a competitive edge. For example, the
lighter wings developed by Airbus will make aircraft more fuel efficient and therefore more attractive to
airlines. This will increase demand for Airbus aircraft. Increased sales should increase profit.
Innovation may also reduce the costs of manufacture. Therefore, prices can be reduced and more sales made.
Evaluation could include a discussion that, although research can produce innovative and profitable
new products, this is not guaranteed. Reasons why research might not result in the anticipated benefits:
• The improvements made to a product may not be sufficient to give it a decisive competitive edge.
• The cost of the development may be too large and therefore the product is not able to recoup the cost.
• R&D often takes years. In dynamic consumer markets, consumer tastes or the economic
environment may change, making the product redundant. By the time Airbus has developed the
new aircraft, there may be no market for it.
• There may be no market for the product developed. If there is poor market research before
undertaking research, the end product is less likely to succeed.
• There is no guarantee that R&D will even lead to the development of a working product.
• Other firms are undertaking R&D at the same time and may find solutions first.

Activity 21.8
1 Sales follow a quarterly pattern. Using moving totals made up of four and eight results enables a
centred quarterly moving average to be calculated.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

2 Year/quarter Sales ($000) Four-quarter Eight-quarter Quarterly Seasonal

moving total moving total moving average variation
2018 Q1 20
Q2 18
Q3 16 19.25 −3.25
Q4 22 76 19.75 2.25
2019 Q1 22 78 154 20.25 1.75
Q2 20 80 158 20.75 −0.75
Q3 18 82 162 21.5 −3.5
Q4 24 84 166 22.25 1.75
2020 Q1 26 88 172 22.75 3.25
Q2 22 90 178 23.25 −1.25
Q3 20 92 182 23.75 −3.75
Q4 26 94 186 24.5 1.5
2021 Q1 28 96 190 25.75 2.25
Q2 26 100 196 27 −1
Q3 26 106 206
Q4 30 110 216

3 Graph showing sales forecast to 2022:

35

Line of
30 best fit

25

20
Sales ($000)

15

10

0
3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2019 2020 2021 2022
4 Q1 = (1.75 + 3.25 + 2.25) ÷ 3 = $2 417; Q2 = − $1 000; Q3 = −$3 500; Q4 = $1 833
5 Q1 = 28 200 + 2 417 = $30 617; Q2 = 28 900 – 1 000 = $27 900; Q3= 29 700 – 3 500 = $26 200;
Q4 = 30 200 + 1 833 = $32 033
6 Learners’ answers might include:
• With sufficient data, predictions can be made for extended future time periods. This could help
Sodhi plan for future cash flow and stock requirements. However, the further into the future a
prediction is made, the lower the probability of it proving accurate.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

• Time series analysis relies on past data and on the trends identified continuing into the future. It is
based on a process of extrapolation, making predictions using past data. Sales patterns, therefore,
need to be stable for the technique to be useful. However, there are many factors that will change
demand that the analysis cannot account for, e.g. the impact of a new competitor, a change in the
economic climate, a change in consumer tastes.
• Time series analysis needs to be used alongside other more qualitative methods to reduce the risk
of inaccurate forecasts.

Exam-style questions
Decision-making questions
1 Mauritius Hotel Company (MHC)
1 Promotional elasticity of demand = percentage change in quantity ÷ percentage change in promotion
For hotels, the percentage change in demand = (60 − 50) ÷ 50 × 100 = 20%
The percentage change in promotional expenditure = (3.0 − 1.5) ÷ 1.5 × 100 = 100%
Therefore, the promotional elasticity of demand = 20 ÷ 100 = 0.2
For restaurants, the percentage change in demand = (15 − 10) ÷ 10 × 100 = 50%
The percentage change in promotional expenditure = (1.0 − 0.8) ÷ 0.8 × 100 = 25%
Therefore, the promotional elasticity of demand = 50 ÷ 25 = 2
2 Advantages of change:
• The promotional elasticity of demand for the hotels is only 0.2. Demand has not been responsive
to the increased promotion. Promotion has doubled but revenue has only increased by 20%.
• MHC may benefit even more from a different form of promotion, i.e. promotional elasticity
of demand could be higher.
• The increase in revenue may not necessarily be the result of the promotion.
Disadvantages of change:
• The promotion for the hotels has been successful in increasing revenue by $10m. This is a
substantial increase in revenue and far exceeds the increased promotional cost of $1.5m.
• The promotion may have increased profit generated by the hotels. This will depend on the
additional costs of providing the service to the increased number of customers.
Repeating the promotional activity for the hotels may have an increased effect in 2022.
3 Learners’ answers might include:
• Competitor spending on promotion. Competitor hotels in Mauritius and other tourist
destinations may be spending heavily on promotion in the same countries as MHC.
Restaurants in Mauritius may not have increased their promotional activity, so increasing the
effectiveness of the promotion undertaken by MHC.
• External factors may have influenced the eventual revenue outcomes. For example, an increase
in incomes in Mauritius would help increase custom to the restaurants. An appreciation of
the Mauritian rupee would make it more expensive for foreign tourists to travel and stay in
Mauritius, which would counteract the positive impact of the promotion. Low economic growth
in the countries in which MHC promotes itself would also impact negatively on demand.
4 Learners’ answers might include:
• If over time MHC collects data on the effect of promotion and it consistently produces the same
elasticity result, this will provide useful data on which to base future promotional spending decisions.
• Estimating the promotional elasticity of demand for future promotional activity is difficult as
a firm cannot be certain how consumers will react to promotion.
• Changes in the external environment will also have a significant impact on the outcome
of a promotion.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL BUSINESS: TEACHER’S RESOURCE

• A firm must also take into account the absolute impact of promotional activity on sales,
not just the relative impact. For MHC, additional promotional expenditure of $1.5 million
contributed to an increase in revenue of $10m.
• There may be long-term benefits to promotional expenditure not reflected in short-term
increases in demand.
• Just because last year’s social media campaign for the restaurant side of the business was
successful does not mean that it will be as successful next year.
Evaluation: calculation of promotional elasticity of demand is useful for businesses to consider in
making marketing decisions but it would be unwise to base major marketing decisions on elasticity
results alone.
5 To forecast sales, MHC uses quantitative analysis, e.g. time series analysis, and a panel of experts,
which is a qualitative technique. Combining these techniques should provide a high-quality forecast.
However, in evaluation, MHC operates in a competitive and dynamic market. It is therefore highly
likely that forecasts will prove to be inaccurate as so many variables can change, e.g. the exchange rate,
price and promotion of competitors, economic growth and unanticipated external shocks such as the
COVID-19 pandemic of 2020.
2 GlaxoSmithKline (GSK) – one of the world’s big researchers
1 The process includes:
• Consideration of a range of ideas for new product development to eliminate ideas that lack
commercial potential. New product development is risky and often expensive so the business
has to focus on ideas with the potential to be commercially successful.
• Development of the concept by considering key questions about the features of the product
and the target market.
• Business analysis of the likely costs, sales and profits to ensure that the concept is viable.
• Developing a prototype of the product and testing it to ensure that it meets performance
targets. Feedback is often taken from focus groups so that the product can be adapted to meet
consumer expectations.
• Test marketing, by launching the product to a small part of the market, is used to get further
feedback from actual consumers. This reduces the risk of a full-scale launch as test marketing
can identify weaknesses which can be corrected before the full launch.
2 Learners’ answers might include:
• Inventions generate new product possibilities. The potential to make huge profits from
blockbuster drugs is considerable. Premium prices and high profit margins can be enjoyed if
effective new medicines are developed.
• For GSK, 65% of sales come from just ten medicines. As GSK’s sales are over $50bn, that
represents sales of over $3.25bn per medicine. This indicates the impact of successful drug
development on company sales.
• The scale of profit possible selling pharmaceuticals is shown by the $7bn made by GSK. These
profits and sales depend on developing new drugs.
• GSK is under pressure to increase R&D from two key sources:
• It needs to find new drugs to replace drugs that are coming to the end of their patent.
Without patent protection, cheaper generic drugs will reduce the revenues of GSK.
• GSK faces tough competition from competitors such as Pfizer. If Pfizer develops new and
effective drugs, this will damage GSK’s sales.
• The case of Breon highlights the risk involved in R&D. GSK cannot be certain of the
outcome of research and GSK’s share price fell with the announcement that Breon failed to
achieve the expected health benefits in trials.
Evaluation may consider the external constraints that pressure GSK to spend more and more on
R&D. If GSK is to remain a leading player in the pharmaceutical industry, it would appear to be
essential that it undertakes significant research. However, it will not guarantee success.

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