Ch3 Ownership of Firms
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keithyan22HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
Multiple Choice Questions
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Which of the following statements about public enterprises is INCORRECT?
A. They are usually not aiming at maximising profit.
B. They must be directly financed and operated by the government.
C. The Airport Authority Hong Kong is an example of a public enterprise.
D. They usually have a relatively reliable and stable source of capital.
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Public enterprise refers to a firm that is wholly owned by the government or her agencies. There are
different types of public enterprises in Hong Kong. Besides government departments that are directly
financed and operated by the government, public enterprises can also be government departments
financed by trading funds.
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Hongkong Post is a
A. private limited company.
B. public limited company.
C. public corporation.
D. public enterprise.
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Hongkong Post is a public enterprise, it is a government department financed by a trading fund.
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Chapter 3 Ownership of Firms
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Which of the following is NOT a public enterprise in Hong Kong?
A. Hong Kong Housing Authority
B. Commerce and Economic Development Bureau
C. Public Bank (Hong Kong) Limited
D. Water Supplies Department
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Public Bank (Hong Kong) Ltd is a private enterprise. Public enterprise refers to a firm that is wholly
owned by the government or her agencies while private enterprise refers to a firm that is privately
owned.
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Which of the following is NOT a public corporation in Hong Kong?
A. Census and Statistics Department
B. Hong Kong Arts Development Council
C. Hong Kong Productivity Council
D. Hong Kong Export Credit Insurance Corporation
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Census and Statistics Department is a government department. It is not a public corporation.
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Chapter 3 Ownership of Firms
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Compared to public enterprises,
(1) private enterprises usually have higher incentive to minimise their costs in order to earn
higher profit.
(2) private enterprises usually have higher sensitivity to market changes.
(3) private enterprises usually have more stable source of capital.
A. (1) only
B. (3) only
C. (1) and (2) only
D. (1) and (3) only
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(3) is incorrect because public enterprises usually have more stable source of capital than private
enterprises as their capital comes from the government.
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Mr. Wong is the only owner of a small newspaper stall. Which of the following is a possible reason for
him to choose this type of business ownership?
A. He bears a smaller business risk as the scale of production is small.
B. The business has a continuity that is lasting.
C. Decision-making is quick and flexible.
D. If the newspaper stall closes down, he does not have to use his personal property to settle the
outstanding debts.
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Chapter 3 Ownership of Firms
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Since Mr. Wong is the only owner, he does not need to get any approval before making decisions.
Decision-making is therefore quick and flexible.
Option A is incorrect. A smaller scale of production does not necessarily imply smaller business risk.
Option B is incorrect. A sole proprietorship is not a legal entity and therefore the continuity of a sole
proprietorship depends on the lifespan of its owner.
Option D is incorrect. Since the newspaper stall is a sole proprietorship, Mr. Wong bears unlimited
liability.
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Which of the following about sole proprietorship is CORRECT?
A. Sole proprietorship is a legal entity.
B. Sole proprietor bears limited liability.
C. If the sole proprietor dies, the firm does not necessarily need to be dissolved.
D. There is usually closer employer-employee relationship when compared with a public
limited company.
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The scale of production of sole proprietorship is usually small. This allows the sole proprietor to have
closer relationships with employees.
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HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
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Which of the following are the features of a sole proprietorship?
(1) Sole proprietorship is not a legal entity.
(2) Decision-making is inflexible.
(3) The legal set-up procedure is simple.
(4) There is a lack of lasting continuity.
A. (1) and (2) only
B. (1) and (3) only
C. (1), (3) and (4) only
D. (2), (3) and (4) only
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(2) is incorrect. Since the sole proprietor is the only owner of the firm, he or she does not need to get
any approval before making decisions and therefore enjoys a high degree of flexibility.
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Which of the following is the feature of a partnership?
A. There is an upper limit of 30 partners in a partnership.
B. It enjoys limited liability.
C. Its financial information can be kept secret.
D. Partners are not bound by the contracts signed by other partner(s).
© Aristo Educational Press Ltd. 3-5
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A partnership is not legally required to disclose its financial information to the public.
Option A is incorrect. There is no upper limit on the number of partners in a partnership.
Option B is incorrect. A partnership is subject to unlimited liability.
Option D is incorrect. Partners are legally responsible for those contracts signed by other partner(s),
although the partners may not have prior agreement before the contracts were signed.
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Mr. Lam and Mr. Chow form a partnership. Which of the following statements is/are CORRECT?
(1) If Mr. Lam goes bankrupt, the partnership has to be dissolved.
(2) If Mr. Lam makes a wrong business decision, Mr. Chow also has to bear the responsibility.
(3) If Mr. Lam and Mr. Chow invest the same amount of capital in the firm, they must share the
profit equally.
(4) Compared with a limited company, the partnership pays lower profits tax rate in Hong Kong.
A. (1) only
B. (2) and (4) only
C. (1), (2) and (4) only
D. (2), (3) and (4) only
© Aristo Educational Press Ltd. 3-6
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Chapter 3 Ownership of Firms
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For (1), the continuity of a partnership depends on the lifespan of its partners. If a partner dies, goes
bankrupt or withdraws, the partnership has to be dissolved.
For (2), all partners are bound by the contracts signed by any partner(s). If Mr. Lam makes a wrong
business decision, Mr. Chow also has to bear the responsibility.
For (4), the profits tax rate of a partnership (15%) for the year of assessment 2008/09 in Hong Kong is
lower than that of a limited company (16.5%).
(3) is incorrect. Partners should have prior agreement on the ratio of sharing profit and loss. Although
they invest the same amount of capital, they can agree on sharing the profit unequally. Although it is
rare, it is not necessary for them to share the profit equally.
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Which of the following is/are the possible reason(s) of turning a business from a sole proprietorship
into a partnership?
(1) The firm enjoys a wider source of capital.
(2) The firm becomes a legal entity.
(3) If one of the partners dies, the business can be run by other partners.
A. (1) only
B. (1) and (2) only
C. (2) and (3) only
D. (1), (2) and (3)
© Aristo Educational Press Ltd. 3-7
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Chapter 3 Ownership of Firms
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For (1), there are at least two partners in a partnership while there is only one owner in a sole
proprietorship. Therefore, capital can be raised among partners and the firm enjoys a wider source of
capital.
(2) is incorrect. Both a sole proprietorship and a partnership are not legal entity.
(3) is incorrect. The continuity of both a sole proprietorship and a partnership is limited. It depends on
the lifespan of the owner(s).
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Which of the following would be a possible reason for a sole proprietor turning his or her business into
a partnership in Hong Kong?
A. He or she can enjoy limited liability.
B. He or she can pay a lower profits tax rate.
C. He or she can make business decisions more flexibly.
D. He or she can have a wider source of capital by admitting new partners.
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Since there is no upper limit on the number of partners in a partnership, the owner is able to raise
capital from admitting new partners. Compared with a sole proprietorship, a partnership has wider
sources of capital.
Option A is incorrect. Owners of both a sole proprietorship and a partnership bear unlimited liability.
Option B is incorrect. In Hong Kong, for the year of assessment 2008/09, the profits tax rate of a sole
proprietorship and that of a partnership are 15%.
Option C is incorrect. In a partnership, getting agreement between partners is time-consuming. He or
she cannot make business decisions more flexibly when the business turns from a sole proprietorship to
a partnership.
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Chapter 3 Ownership of Firms
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Which of the following is NOT a possible reason for a sole proprietorship to turn the business into a
partnership?
(1) Business risk can be shared among partners.
(2) If the partnership goes bankrupt, the partners are not personally liable for the firm’s debts.
(3) Partnership usually has a wider source of capital.
(4) Making business decisions is more flexible in a partnership.
A. (1) only
B. (1) and (3) only
C. (2) and (4) only
D. (2), (3) and (4) only
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For (2), both partnership and sole proprietorship are subject to unlimited liability and the owners may
have to use personal property to settle outstanding debts.
For (4), making decisions is more time-consuming for a partnership as it needs the consent of every
partner. In contrast, since there is only one owner in a sole proprietorship, the owner does not need to
get any approval before making decisions. Therefore, decision-making becomes less flexible.
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Which of the following is the difference between a sole proprietorship and a partnership?
A. A partnership has a larger amount of capital than a sole proprietorship.
B. A partnership is a legal entity while a sole proprietorship is not.
C. Business risk can be shared among partners in a partnership while a sole proprietor cannot.
D. Decision-making in a partnership is quicker and more flexible than that in a sole
proprietorship.
© Aristo Educational Press Ltd. 3-9
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Chapter 3 Ownership of Firms
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Since all partners are bound by the contracts signed by any partner(s), business risk can be shared
among partners. In contrast, a sole proprietorship has to bear the entire responsibility.
Option A is incorrect. A partnership may have a wider source of capital than a sole proprietorship.
However, it does not necessarily have a larger amount of capital than a sole proprietorship.
Option B is incorrect. Both a partnership and a sole proprietorship are not legal entity.
Option D is incorrect. In a partnership, getting agreement between partners is time-consuming. Owners
cannot make business decisions more flexibly when the business turns from a sole proprietorship to a
partnership.
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What is/are the common feature(s) of a sole proprietorship and a partnership?
(1) no upper limit on the number of owners
(2) lack of lasting continuity
(3) lower profits tax rate in Hong Kong compared with a limited company
A. (1) only
B. (2) and (3) only
C. (1) and (3) only
D. (1), (2) and (3)
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(1) is incorrect. Sole proprietorship is a firm owned by only one owner. On the other hand, the law
requires a partnership to have at least two partners and there is no upper limited on the number of
partners in Hong Kong.
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HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
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Which of the following statements about a private limited company is CORRECT?
A. It has a higher degree of privacy with its financial status than a public limited company has.
B. There is no upper limit on the number of owners of a private limited company.
C. Its shares can be exchanged freely on the stock exchange.
D. It earns higher profit than a partnership.
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A private limited company does not need to disclose its financial statement to the public while a public
limited company is required to do so. Thus, a private limited company has a higher degree of privacy
with its financial status.
Option B is incorrect. The maximum number of shareholders of a private limited company is 50.
Option C is incorrect. The shares of a private limited company can only be transferred with the consent
of other shareholders. The shares cannot be freely traded on the stock exchange.
Option D is incorrect. A private limited company does not necessarily earn higher profit than a
partnership.
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Mr. and Mrs. Yu are shareholders of a private limited company. Which of the following is/are
CORRECT?
(1) Mr. and Mrs. Yu’s losses are limited to the amount of their investment in the company.
(2) Mr. and Mrs. Yu can sell their shares to others freely without the consent of other
shareholders.
(3) The company has to disclose its financial statements to the public.
A. (1) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
© Aristo Educational Press Ltd. 3-11
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Chapter 3 Ownership of Firms
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Since shareholders of a private limited company enjoy limited liability, they are not personally
responsible for the outstanding debts of the firm.
(2) is incorrect. The shares of a private limited company can only be transferred with the consent of
other shareholders.
(3) is incorrect. A private limited company has to disclose its financial statements to its shareholders
only.
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Which of the following is/are NOT feature(s) of a private limited company?
(1) There is no upper limit on the number of shareholders.
(2) It has to disclose its financial statements to the public regularly.
(3) Its shares can be transferred with the consent of other shareholders.
A. (1) only
B. (2) only
C. (1) and (2) only
D. (1) and (3) only
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For (1), there is an upper limit of 50 shareholders of a private limited company.
For (2), it has to disclose its financial statements to its shareholders only.
(3) is incorrect. The shares of a private limited company can only be transferred with the consent of
other shareholders.
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© Aristo Educational Press Ltd. 3-12
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
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Which of the following is/are possible reason(s) of turning a business from a partnership to a private
limited company?
(1) Owners of a private limited company do not have to bear legal responsibility for the firm.
(2) Shares of a private limited company can be transferred freely without the consent of other
shareholders.
(3) If one of the shareholders retires, the business does not have to be dissolved.
A. (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
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For (1), a private limited company is a legal entity. Shareholders do not have to bear legal
responsibility for the firm.
For (3), since a private limited company is a legal entity, the retirement of a shareholder does not affect
the continuity of the business.
(2) is incorrect. The shares of can only be transferred with the consent of other shareholders.
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Mrs. Lam prefers to set up a sole proprietorship to a private limited company in Hong Kong because
she wants to
A. keep the financial status of her company secret from the public.
B. take part in the management of the company.
C. pay a lower profits tax rate.
D. enjoy limited liability.
© Aristo Educational Press Ltd. 3-13
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The profits tax rate of a sole proprietorship (15%) for the year of assessment 2008/09 in Hong Kong is
lower than that of a private limited company (16.5%).
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Compared to a limited company, a sole proprietorship usually has
A. a longer continuity.
B. a wider source of capital.
C. a closer employer-employee relationship.
D. to pay a higher profits tax rate.
##
The scale of production of a sole proprietorship is usually small. This allows the sole proprietor to have
closer relationship with employees.
Option A is incorrect. The continuity of a sole proprietorship is limited. It depends on the lifespan of
the firm’s owner.
Option B is incorrect. A sole proprietorship cannot issue shares to raise capital while a limited company
can.
Option D is incorrect. Compared with a limited company, the profits tax rate of a sole proprietorship is
lower.
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© Aristo Educational Press Ltd. 3-14
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
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Which of the following statements about a public limited company are CORRECT?
(1) It can issue shares to the public.
(2) It can choose whether to disclose its financial statements to the public or not.
(3) There is no upper limit on the number of shareholders.
(4) The risk of the company being taken over is higher than that of a private limited company.
A. (1) and (3) only
B. (2) and (4) only
C. (1), (2) and (3) only
D. (1), (3) and (4) only
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(2) is incorrect. A public limited company must disclose its financial statements regularly to the public.
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Which of the following is NOT a feature of a public limited company?
A. There is no upper limit on the number of shareholders.
B. Shares of a public limited company may not be traded freely on the stock exchange.
C. It has limited continuity.
D. The legal set-up procedure is complicated.
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Since a public limited company is a legal entity, the retirement, bankruptcy or death of shareholders
does not affect the continuity of the business.
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© Aristo Educational Press Ltd. 3-15
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
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If a company is listed, which of the following statements is/are CORRECT?
(1) Its shares can be freely traded on the stock exchange without consent of other shareholders.
(2) Its shares bear a floating dividend rate.
(3) Its shareholders may have capital gain by buying and selling the shares on the stock
exchange.
(4) Its shareholders are guaranteed to have dividend.
A. (2) only
B. (3) and (4) only
C. (1), (2) and (3) only
D. (1), (3) and (4) only
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(4) is incorrect. The company has no obligation to pay a dividend to shareholders even when it makes
profit. Therefore, shareholders are not guaranteed to have dividend.
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If a private limited company turns into a public limited company,
A. the shareholders can then enjoy limited liability.
B. the company does not need to disclose its financial statements to the public.
C. it can have a wider source of capital.
D. the number of shareholders are limited to 50.
© Aristo Educational Press Ltd. 3-16
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Chapter 3 Ownership of Firms
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A public limited company can be listed and issue shares to the public to raise capital, but a private
limited company cannot.
Option A is incorrect. Owners of both a private limited company and a public limited company enjoy
limited liability.
Option B is incorrect. A public limited company has to disclose its financial statements to the public
regularly.
Option D is incorrect. There is no upper limit on the number of shareholders of a public limited
company.
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Which of the following is NOT a difference between a private limited company and a public limited
company?
A. A public limited company has no upper limit on the number of shareholders, while a private
limited company has.
B. Shareholders of a private limited company can freely trade their shares on the stock
exchange, while a public limited company cannot.
C. A public limited company has to disclose its financial statements to the public, while a
private limited company does not need to do so.
D. A public limited company has a wider source of capital than a private limited company.
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Only shares of a listed company can be traded freely on the stock exchange. A private limited company
cannot be a listed company but a public limited company can.
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HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
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Mr. Cheung prefers investing in a listed company to a private limited company in Hong Kong. It may
be because
A. he can earn a higher dividend.
B. he can transfer the shares freely on the stock exchange.
C. he can have controlling power over the company.
D. he can enjoy limited liability.
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Only shares of a listed company can be traded freely on the stock exchange.
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Which of the following statements about a private limited company and a public limited company is
CORRECT?
A. Both of them have no upper limit on the number of shareholders.
B. Both of them can issue shares to the public.
C. Shareholders of both the private and public limited companies enjoy limited liability.
D. Both of them need to disclose their financial statements to the public.
© Aristo Educational Press Ltd. 3-18
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Chapter 3 Ownership of Firms
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Shareholders of both the private and public limited companies enjoy limited liability. The liability of
shareholders is limited to the amount of their investment.
Option A is incorrect. The number of shareholders of a private limited company is limited to 50.
Option B is incorrect. The shares of a private limited company can only be transferred with the consent
of other shareholders. The shares are not freely traded on the stock exchange.
Option D is incorrect. A private limited company has to disclose its financial statements to its
shareholders only.
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Which of the following is a difference between a private limited company and a public limited
company?
A. In Hong Kong, the profits tax rate of a private limited company is lower than that of a public
limited company.
B. A public limited company has a wider source of capital than a private limited company.
C. A private limited company requires a smaller amount of set-up capital than a public limited
company.
D. A public limited company has a separation of ownership and management while a private
limited company does not.
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A public limited company can be listed on the stock exchange and issue shares to the public while a
private limited company cannot. Therefore, a public limited company has a wider source of capital.
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© Aristo Educational Press Ltd. 3-19
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Chapter 3 Ownership of Firms
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A public limited company __________ than a private limited company.
A. is a less risky type of ownership
B. has smaller risk of being taken over
C. is less likely to enjoy economies of scale
D. has a wider source of capital
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A public limited company can be listed and issue shares to the public while a private limited company
cannot issue shares to the public. Therefore, a public limited company has a wider source of capital.
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A firm turns from a private limited company to a public limited company. Which of the following is the
possible reason for this decision?
A. Shareholders can then enjoy limited liability.
B. The transfer of ownership becomes more flexible.
C. It will then have a larger amount of capital.
D. It will then have a better employer-employee relationship.
© Aristo Educational Press Ltd. 3-20
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Chapter 3 Ownership of Firms
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A public limited company can be listed and shares can be freely traded on the stock exchange while a
private limited company cannot. The transfer of ownership of a public limited company is thus more
flexible.
Option A is incorrect. Shareholders of both a private limited company and a public limited company
enjoy limited liability.
Option C is incorrect. A public limited company has a wider source of capital than a private limited
company since it can be listed and issue shares to the public. However, this does not imply that it has a
larger amount of capital than a private limited company.
Option D is incorrect. It is not necessarily true for a public limited company to have a better employer-
employee relationship than a private limited company.
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A firm can issue shares to raise capital. However, the shares can only be transferred with the consent of
other shareholders. The firm is probably a
A. sole proprietorship.
B. partnership.
C. private limited company.
D. public limited company.
##
Among the choices above, only a private limited company and a public company can issue shares to
raise capital. The transfer of shares of a private limited company needs the consent of other
shareholders while the transfer of shares of a public limited company does not need the consent of
other shareholders. Therefore, the firm is most probably a private limited company.
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Chapter 3 Ownership of Firms
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Mr. Lee is a sole proprietor. He wants to widen the source of capital and enjoy limited liability.
However, he does not want people other than the shareholders to know the financial status of his
company. Which of the following forms of ownership should he choose?
A. partnership
B. private limited company
C. listed company
D. public limited company
##
Compared with a partnership, a private limited company, a listed company and a public limited
company provide Mr. Lee with wider source of capital while the shareholders can enjoy limited
liability. However, only private limited companies are not required to disclose its financial statements
to the public. It only has to disclose its financial statements to its shareholders.
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Mr. Chan and Mr. Wong are the owners of a firm. Recently, the firm encounters financial difficulties
and fails to pay the debts. As Mr. Chan has declared bankrupt, Mr. Wong has to sell his personal
properties to pay the creditors. According to the above information, the firm is a
A. sole proprietorship.
B. partnership.
C. private limited company.
D. public limited company.
© Aristo Educational Press Ltd. 3-22
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
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Among the options above, only a sole proprietorship and a partnership bear unlimited liability. Since
there is more than one owner, the firm is a partnership. Partners may need to use their personal assets to
settle the firm’s outstanding debts.
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Anna is one of the owners of a firm. She enjoys limited liability but she cannot transfer her ownership
to others without the consent of other owners. The firm is most likely a
A. sole proprietorship.
B. partnership.
C. private limited company.
D. public limited company.
##
Of the four options provided, only the owners of a private and public limited company enjoy limited
liability. The transfer of shares of a private limited company needs the consent of other shareholders
while the transfer of shares of a public limited company does not need the consent of other
shareholders. Therefore, the firm is most likely a private limited company.
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Miss Lee is one of the owners of a firm. She has to settle the outstanding debts with her personal
properties if her company goes bankrupt. The firm is a
A. sole proprietorship.
B. partnership.
C. public enterprise.
D. private limited company.
© Aristo Educational Press Ltd. 3-23
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Chapter 3 Ownership of Firms
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There is more than one owner in the firm, so it not a sole proprietorship.
For options B, C and D, only a partnership have to bear unlimited liability, which means that the
partners are personally responsible for the debts of the firm.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000037|!|
Miss Ho is one of the owners of a firm. The firm is a legal entity and she can freely transfer her
ownership to others. The firm is a
A. sole proprietorship.
B. partnership.
C. private limited company.
D. listed company.
##
Among the options above, only a private limited company and a listed company are legal entities.
However, only shares of a listed company can be traded freely. Therefore, the firm is a listed company.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000038|!|
Jason is one of the owners of a firm. His liability and loss are limited to the amount of his investment in
the firm. However, he cannot transfer his ownership to others without the consent of other owners.
Based on the information above, the firm is a
A. sole proprietorship.
B. partnership.
C. private limited company.
D. public limited company
© Aristo Educational Press Ltd. 3-24
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
Owners of both the private limited company and public limited company enjoy limited liability. The
transfer of shares of a private limited company needs the consent of other shareholders while the
transfer of shares of a public limited company does not need the consent of other shareholders.
Therefore, the firm is a private limited company.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000039|!|
Suppose a boutique liquidates. The owners are not personally responsible for the outstanding debts of
the firm if the firm is a
(1) sole proprietorship.
(2) partnership.
(3) private limited company.
(4) public limited company.
A. (1) and (2) only
B. (2) and (4) only
C. (3) and (4) only
D. (2), (3) and (4) only
##
Among the options above, only the owners of a private limited company and a public limited company
enjoy limited liability.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-25
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000040|!|
Tommy, Louis and Jeff own a firm. The firm is a legal entity. Which of the following must be TRUE?
A. The shares can be traded freely on the stock exchange.
B. The firm has to disclose its financial statements to the public regularly.
C. If one of them dies, the continuity of the business will not be affected.
D. At least one of them has to bear unlimited liability.
##
Since a limited company is a legal entity, the death of the shareholders will not affect the continuity of
the business.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000041|!|
Mr. Lo is the only owner of his company and the company is not a legal entity. Which of the following
statements is CORRECT?
A. In order to raise capital, he can issue shares.
B. His business will be carried on by his family if he dies.
C. If the company goes bankrupt, he is personally liable for the outstanding debts.
D. The firm itself has the rights to own properties.
© Aristo Educational Press Ltd. 3-26
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
Mr. Lo’s company is a sole proprietorship because he is the only owner of the company and the
company is not a legal entity. The liability of the sole proprietor is unlimited, which means that the
owner is personally responsible for the financial debts of the company.
Option A is incorrect. A sole proprietorship cannot issue shares to raise capital.
Option B is incorrect. The continuity of a sole proprietorship is limited. It depends on the lifespan of
the owner.
Option D is incorrect. Since a sole proprietorship is not a legal entity, it cannot own properties in its
own name.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000042|!|
Candy and Carol are the owners of a firm which is not a legal entity. Which of the following statements
is INCORRECT?
A. Candy and Carol are personally responsible for the debts of the firm if it goes bankrupt.
B. Candy cannot invite a friend to invest in the firm without the consent of Carol.
C. If Candy withdraws, Carol cannot continue the business.
D. If Candy makes any wrong decision, Carol can refuse to take the responsibility of the
outcome.
##
The firm is a partnership. All partners are bound by the contracts signed by any partner(s). They are
legally responsible for those contracts although the partners may not have prior agreement before the
contracts were signed. Therefore, Carol is responsible for the wrong decision that Candy makes.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-27
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000043|!|
The transfer of ownership in both firm A and firm B needs the consent of other owners. However, firm
A is not a legal entity while firm B is a legal entity.
Based on the information above, which of the following statements are CORRECT?
(1) The profits tax rate paid by firm B is higher than that of firm A in Hong Kong.
(2) Both firm A and firm B enjoy lasting continuity.
(3) Firm B can issue shares to the public to raise capital while firm A cannot.
(4) For firm B, there is an upper limit on the number of owners while for firm A, there isn’t.
A. (1) and (4) only
B. (2) and (3) only
C. (1), (2) and (4) only
D. (1), (3) and (4) only
##
For (1), firm A is a partnership and firm B is a private limited company. In Hong Kong, the profits tax
rate of a private limited company (16.5%) for the year of assessment 2008/09 is higher than that of a
partnership (15%).
For (4), the number of shareholders of a private limited company (firm B) ranges from 1 to 50 while
there is no upper limit on the number of partners in a partnership (firm A).
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000044|!|
Firm A and firm B are legal entities. However, the ownership of firm A can only be transferred with the
consent of other owners while the transfer of ownership of firm B is not required to do so.
Based on the information above, which of the following statements is CORRECT?
A. Firm A and firm B are public limited company and private limited company respectively.
B. Firm A and firm B are listed company and private limited company respectively.
C. Firm A and firm B are private limited company and public limited company respectively.
D. Firm A and firm B are public limited company and listed company respectively.
© Aristo Educational Press Ltd. 3-28
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
Since firm A and firm B are legal entities, they can be a private limited company, a public limited
company or a listed company. However, as the shares of a private limited company can only be
transferred with the consent of other owners, firm A therefore is a private limited company. For firm B,
since the public can buy and sell the company’s shares without the consent of other shareholders, it is
therefore a public limited company.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000045|!|
Firm X and firm Y are business partners. Firm X sues firm Y because firm Y repudiates an agreement.
Firm X is possibly a __________ and firm Y is possibly a ___________.
A. partnership … sole proprietorship
B. sole proprietorship … private limited company
C. public limited company … partnership
D. private limited company … public limited company
##
A private limited company and a public limited company are legal entities, so they can sue each other.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-29
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000046|!|
Firm A
Number of owners 10
Transfer of ownership Freely transferable
Liability Limited
According to the above information, firm A is a _________________.
A. public limited company
B. private limited company
C. partnership
D. sole proprietorship
##
Among the options above, only owners of a public limited company and a private limited company can
enjoy limited liability. However, only the shares of a public limited company can be freely traded on
the stock exchange. The shares of a private limited company can only be transferred with the consent of
other shareholders. Therefore, firm A is a public limited company.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-30
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000047|!|
Firm A Firm B
Number of owners 3 3
Does not need the consent of Needs the consent of other
Transfer of ownership
other owner(s) owner(s)
Liability Limited Unlimited
Refer to the information above, which of the following statements is CORRECT?
A. If one of the owners withdraws, firm A will be dissolved.
B. Firm A and firm B can sue each other.
C. In Hong Kong, firm A pays a higher profits tax rate than firm B.
D. Both firms can issue shares to the public to raise capital.
##
From the information above, we can conclude that firm A is a public limited company and firm B is a
partnership. The profits tax rate of a limited company (16.5%) is higher than that of a partnership
(15%) for the year of assessment 2008/09 in Hong Kong.
Option A is incorrect. Since firm A is a public limited company, it is a legal entity. The retirement,
bankruptcy or death of the shareholders will not affect the continuity of the business.
Option B is incorrect. Since firm B is a partnership, it is not a legal entity. It cannot sue or be sued.
Option C is incorrect. Firm B cannot issue shares to the public to raise capital as it is a partnership.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000048|!|
Which of the following statements about bonds is CORRECT?
A. Bondholders bear unlimited liability.
B. Bonds can only be transferred with shareholders’ consent.
C. The returns to bonds are stable.
© Aristo Educational Press Ltd. 3-31
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
D. Bondholders are repaid after the shareholders if the company goes bankrupt.
##
Regardless of whether the company makes a profit or not, there is an obligation to pay the fixed interest
to bondholders. Therefore, the returns to bonds are stable.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000049|!|
To bondholders, the interest rate is ________ and they can claim repayment ________ shareholders if
the company liquidates.
A. floating … before
B. floating … after
C. fixed … before
D. fixed … after
##
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000050|!|
Compared to bondholders, shareholders
A. enjoy limited liability.
B. enjoy higher interest rate.
C. claim repayment after the bondholders do if the company winds up.
D. do not have voting rights in the annual general meeting.
##
##
@@x)nil,1@@
© Aristo Educational Press Ltd. 3-32
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
[[]]
© Aristo Educational Press Ltd. 3-33
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000051|!|
Which of the following is NOT a difference between shareholders and bondholders?
A. Shareholders are the owners of the company while bondholders are creditors.
B. Shareholders receive dividend while bondholders receive interest.
C. Shareholders have voting rights during the annual general meeting while bondholders do not.
D. Shareholders can claim repayment prior to bondholders if the company winds up.
##
It is the bondholders who can claim repayment prior to shareholders if the company winds up.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000052|!|
If a listed company winds up, ____________ is/are repaid prior to ____________.
A. shareholders … the government
B. bondholders … the government
C. shareholders … bondholders
D. bondholders … shareholders
##
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-34
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000053|!|
From the viewpoint of the existing shareholders of a listed company, which of the following is an
advantage of issuing bonds over ordinary shares to raise capital?
A. Bondholders do not have voting rights.
B. The interest rate that paid to bondholders is lower than the dividend rate that paid to
shareholders.
C. The company enjoys a higher degree of privacy with its financial status.
D. If the company suffers a loss, it can pay lower interest rate to bondholders while it still has to
pay a fixed dividend rate to shareholders.
##
Since bondholders are creditors of the company and they do not have voting rights in the annual
general meeting, the existing shareholders’ power of control over the company will not be diluted.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000054|!|
From the viewpoint of the existing shareholders, which of the following is the impact of issuing
ordinary shares?
A. The existing shareholders will receive more dividends.
B. The share price will rise and thus the existing shareholders can enjoy capital gains.
C. Their power of control over the company will be diluted if new ordinary shares are issued to
a third party.
D. If the company winds up, existing shareholders may not be able to claim repayment.
##
Both new shareholders and existing shareholders have voting rights. Thus, when new shares are issued,
existing shareholders’ power of control over the company will be diluted.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-35
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000055|!|
From the company’s point of view, which of the following statements about raising capital through
issuing shares and bonds is CORRECT?
A. The dividend rate paid to shareholders must be lower than the interest rate paid to
bondholders.
B. More capital can be raised by issuing shares.
C. There is redemption date for bonds, but not for shares.
D. The company has the obligation to pay a dividend to shareholders, but not to bondholders.
##
Bondholders are creditors of a company. The interest rate and redemption date are fixed in advance.
The company therefore has the obligation to redeem the bonds. There is no redemption date for shares.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000056|!|
A company plans to raise capital by issuing shares and bonds. Which of the following statements is
FALSE?
A. Issuing shares allows the company to have higher flexibility in retaining profit for future
development.
B. Issuing shares and bonds will dilute the controlling power of existing shareholders over the
company.
C. If the company suffers a loss, it can choose not to pay dividends to shareholders.
D. The interest rate paid to bondholders is fixed in advance while the dividend rate paid to
shareholders is not fixed.
© Aristo Educational Press Ltd. 3-36
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
The issue of shares will dilute the controlling power of existing shareholders over the company because
new shareholders have voting rights in the annual general meeting. However, bondholders do not have
voting rights in the annual general meeting, so that the issue of bonds will not dilute the controlling
power of the existing shareholders over the company.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000057|!|
Miss Chan plans to make an investment. She wants to have stable returns and does not want to be
personally liable for the debts of the company. Which of the following should she choose?
(1) be a partner of a firm
(2) buy bonds of a firm
(3) buy shares of a firm
A. (2) only
B. (3) only
C. (1) and (3) only
D. (1) and (2) only
##
Bondholders are creditors of a firm who receive fixed rates of interest.
(1) is incorrect. As a partner, she has to bear unlimited liability and may have to use her personal
property to settle outstanding debts.
(3) is incorrect. Since the dividend rate is not fixed, she cannot receive stable returns.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-37
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000058|!|
From the point of view of an investor, which of the following is the advantage of holding shares over
bonds?
A. Shareholders get repayment before bondholders if the company goes bankrupt.
B. The dividend rate of shareholders is higher the interest rate of bondholders.
C. Regardless of whether the company makes profit or not, shareholders still receive dividend.
D. Shareholders have controlling power over the company while bondholders do not.
##
Since shareholders are the owners of the company, they have voting rights in the annual general
meeting and therefore they have some controlling power over the company. However, bondholders are
only creditors of the company and they do not have voting rights in the annual general meeting.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000059|!|
From shareholders’ point of view, which of the following is an advantage of buying shares over bonds?
A. If the company goes bankrupt, shareholders can claim repayment before bondholders.
B. Shareholders have a controlling power over the company.
C. Shareholders are guaranteed to have a higher dividend rate.
D. If the company suffers a loss, shareholders still receive part of the dividend while
bondholders may get nothing.
##
Since shareholders are the owners of the company, they have voting rights in the annual general
meeting and therefore have controlling power over the company. On the other hand, bondholders are
only creditors of the company and they do not have voting rights in the annual general meeting.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-38
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000060|!|
Which of the following is the disadvantage of buying shares over bonds?
(1) The return on shares is not guaranteed.
(2) Shareholders do not have voting rights in the annual general meeting.
(3) Shareholders are repaid after bondholders if the company goes bankrupt.
A. (1) only
B. (1) and (2) only
C. (1) and (3) only
D. (2) and (3) only
##
Shareholders receive dividend that is not fixed and depends entirely on the profits of the year. The rate
of return is therefore uncertain.
(2) is incorrect. Since the shareholders are owners of a firm, they have voting rights in the annual
general meeting.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000061|!| (2012)
When a private limited company is converted into a listed company,
A. its risk of being taken over is lower.
B. it acquires the rights to issue shares to the public.
C. it is controlled by the government.
D. it gains the status of a legal entity.
##
A private limited company cannot issue shares to the public while a listed company can.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-39
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000062|!| (2012)
Study the following table.
Firm A Firm B
Number of owners 2 30
Does not need the consent of Needs the consent of other
Transfer of ownership
the other owner owners
Legal status A legal entity Not a legal entity
Referring to the above table, which of the following is CORRECT?
A. Firm A pays a higher profits tax rate than Firm B.
B. Firm A has less capital than Firm B.
C. Firm A cannot be sued while Firm B can.
D. Firm A can keep its financial information secret while Firm B cannot.
##
Firm A is a public limited company and Firm B is a partnership. A public limited company pays a
higher profits tax rate than a partnership.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-40
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000063|!| (2012)
From a small investor’s point of view, which of the following is the possible reason(s) for buying
ordinary shares instead of bonds?
(1) The rate of return is more stable for ordinary shares than bonds.
(2) Ordinary shareholders can claim repayment prior to bondholders if the company winds up.
(3) Ordinary shareholders may enjoy higher dividend than bondholders if the company earns
huge profits.
A. (1) only
B. (3) only
C. (1) and (2) only
D. (2) and (3) only
##
(3) is correct. Bondholders can only receive a fixed rate of interest even if the company earns huge
profits where ordinary shareholders may enjoy considerably high dividends.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000064|!| (2014)
Which of the following statements about public enterprises in Hong Kong is/are CORRECT?
(1) RTHK is a public enterprise in Hong Kong.
(2) Some public enterprises operate on a self-financing basis.
(3) Compared to private enterprises, it is easier for pubic enterprises to obtain information from
the government.
A. (3) only
B. (1) and (2) only
C. (2) and (3) only
D. (1), (2) and (3)
© Aristo Educational Press Ltd. 3-41
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
##
@@x)nil,1@@
[[]]
|!|1eEMA0030000065|!| (2014)
Which of the following is the difference between public enterprises and private enterprises?
A. Public enterprises do not face competition while private enterprises face keen competition.
B. Public enterprises usually have weaker incentive to improve their production efficiency than
private enterprises.
C. Public enterprises usually operate on a larger scale than private enterprises.
D. Public enterprises are usually more sensitive to market changes than private enterprises.
##
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000066|!| (2014)
Compared with a partnership, a sole proprietorship
A. has less capital for expansion.
B. has more flexibility in decision making.
C. is subject to a lower profits tax rate.
D. bears lower business risk.
© Aristo Educational Press Ltd. 3-42
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
As there is only one owner in a sole proprietorship, the owner does not need to get the approval of
others before making decisions.
Option A is incorrect. A sole proprietorship may have narrower sources of capital, but it does not
necessarily have less capital.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000067|!| (2014)
Which of the following is a disadvantage of a sole proprietorship over a partnership?
A. A sole proprietor bears unlimited liability.
B. A sole proprietor bears higher business risk.
C. It lacks lasting continuity.
D. It has fewer sources of capital.
##
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-43
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000068|!| (2014)
Suppose a partnership is turned into a public limited company. Which of the following statements is
CORRECT?
(1) The number of owners must increase.
(2) The company will have an independent legal status.
(3) The company’s financial status cannot be kept secret.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
##
For (2), the company will become a legal entity, so it will have an independent legal status.
For (3), the company will have to disclose its accounting information to the public regularly, so its
financial status cannot be kept secret.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000069|!| (2014)
Which of the following are disadvantages of being a private limited company instead of a public
limited company?
(1) It cannot issue shares and bonds to the public to raise capital.
(2) It is difficult for shareholders to transfer their ownership.
(3) It lacks lasting continuity.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
© Aristo Educational Press Ltd. 3-44
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
(3) is incorrect. Both private limited companies and public limited companies are legal entities. The
retirement, bankruptcy or death of shareholders will not affect the continuity of the company.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000070|!| (2014)
Which of the following is an advantage of being a private limited company instead of a public limited
company in Hong Kong?
A. It is subject to a lower profits tax rate.
B. It has a tighter control of ownership.
C. Its owners’ greatest loss is limited to the amount of their investment in the firm.
D. All of the above.
##
As the shares of a private limited company can only be transferred with the consent of other
shareholders, the existing shareholders have tighter control over the ownership.
Option A is incorrect. In Hong Kong, both a private limited company and a public limited company are
subject to the same profits tax rate.
Option C is incorrect. Owners of both private limited companies and public limited companies bear
limited liability.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000071|!| (2014)
After a company turns from a public limited company to a private limited company,
A. it loses its independent legal status.
B. the upper limit on the number of shareholders increases.
C. it has to disclose its accounting information to its shareholders only.
D. its shares can be transferred without the consent of other shareholders.
© Aristo Educational Press Ltd. 3-45
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
Option A is incorrect. Both public limited companies and private limited companies are legal entities,
so both of them have independent legal status.
Option B is incorrect. The upper limit on the number of shareholders is reduced from unlimited to 50.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000072|!| (2014)
Which of the following is NOT a common feature of a private limited company and a public limited
company?
A. Their set-up procedures are more complicated than setting up a partnership.
B. They continue to exist if some shareholders go bankrupt.
C. The liability of their shareholders is confined to the amount of investment in the companies.
D. Their shares can be freely traded.
##
Shares of a private limited company can only be transferred with the consent of other shareholders.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-46
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000073|!| (2014)
In firm A, there are two owners. The firm continues to exist even if one of the owners dies. Which of
the following is/are the possible form(s) of ownership of firm A?
(1) partnership
(2) private limited company
(3) public limited company
A. (1) only
B. (3) only
C. (1) and (2) only
D. (2) and (3) only
##
(1) is incorrect. For a partnership, if one of the owners dies, it has to be dissolved.
##
@@x)nil,1@@
[[]]
|!|1eEMC0030000074|!| (2014)
After firm A changed its form of ownership, it began to enjoy limited liability but its risk of being taken
over increased. We can conclude that the firm was a _______________ in the past while it is a
_______________ now.
A. partnership … public limited company
B. private limited company … public limited company
C. partnership … private limited company
D. sole proprietorship … partnership
© Aristo Educational Press Ltd. 3-47
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
When a sole proprietorship or a partnership changes to a limited company, it can enjoy limited liability.
As the ownership of a public limited company can be freely transferred, the risk of the firm being taken
over increases.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000075|!| (2014)
Firm A Firm B
Number of owners 10 10
Needs the consent of other Needs the consent of other
Transfer of ownership
owners owners
Continues to exist when one of Will be dissolved when one of
Continuity
the owners withdraws the owners withdraws
According to the above information, firm A and firm B are a ________________ and a
________________ respectively.
A. private limited company … public limited company
B. private limited company … partnership
C. public limited company … partnership
D. public limited company … private limited company
##
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-48
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eEMB0030000076|!| (2014)
Firm A Firm B
Number of owners 2 25
Does not need the consent of Needs the consent of other
Transfer of ownership
other owners owners
Liability Limited Limited
According to the above information, which of the following statements about firm A and firm B is
CORRECT?
A. Firm A can sue firm B while firm B cannot sue firm A in the name of the company.
B. Firm B is required to disclose its accounting information to the public while firm A is not.
C. Both firms can raise capital by issuing shares to the public.
D. Both firms continue to exist when one of their owners goes bankrupt.
##
According to the above information, firm A is a public limited company while firm B is a private
limited company. As both firm A and firm B are legal entities, the bankruptcy of shareholders will not
affect the continuity of the firms.
Option A is incorrect. As both firm A and firm B are legal entities, they can sue each other in the name
of the company.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000077|!| (2014)
If a limited company winds up, which of the following parties is the last to be repaid?
A. bondholders
B. government
C. shareholders
D. employees
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HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000078|!| (2014)
A listed company raises capital for expansion by issuing more ordinary shares instead of bonds. This
can
A. avoid increasing interest burden.
B. strengthen the existing shareholders’ control over the company.
C. raise more capital.
D. reduce the risk of being taken over.
##
As the company has no obligation to pay a dividend to shareholders while it is obliged to pay a fixed
interest to bondholders regardless of whether the company turns a profit, issuing more ordinary shares
can avoid increasing interest burden.
##
@@x)nil,1@@
[[]]
|!|1eEMB0030000079|!| (2014)
The ratio of bonds to ordinary shares in Mr. Chan’s asset portfolio is high. This is because
(1) the rate of return from bonds is higher.
(2) holding bonds can affect the companies’ decision-making.
(3) the investment risk of buying bonds is lower.
A. (3) only
B. (1) and (3) only
C. (1) and (2) only
D. (2) and (3) only
© Aristo Educational Press Ltd. 3-50
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
For (3), bondholders can claim repayment prior to shareholders if the company winds up. The
investment risk is thus lower.
(1) is incorrect. Bonds bear a fixed rate of interest, but it is not necessarily higher than that of ordinary
shares.
(2) is incorrect. Bondholders do not have voting rights in the annual general meeting.
##
@@x)nil,1@@
[[]]
© Aristo Educational Press Ltd. 3-51
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
Short Questions
|!|1eESB0030000001|!|
Alan runs his business by selling various products online through “Yahoo! Auction”. He does not run
the business at any premises.
(a) Without a physical location, is Alan’s business a firm? Explain. (2 marks)
(b) Alan sends his goods to the buyers by post. Which basic economic problem(s) is/are involved?
(2 marks)
##
(a) Yes, it is a firm. A firm is a planning unit of production that employs factors of production and
produces goods and services. It can exist without a physical location. (2 marks)
(b) The problem of “how to produce” is involved. Sending the goods by post concerns the method of
production. (2 marks)
##
@@a)nil,2@@
@@b)cro,2@@
[[]]
|!|1eESB0030000002|!|
(a) Define firm. (2 marks)
(b) What is the difference between a firm and a plant? (2 marks)
##
(a) A firm is a planning unit of production. It employs factors of production and produces goods and
services. (2 marks)
(b) A firm can exist without a physical location while a plant is the physical location where
production takes place while a firm can exist without a physical location. (2 marks)
##
@@a)nil,2@@
@@b)nil,2@@
[[]]
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Chapter 3 Ownership of Firms
|!|1eESB0030000003|!|
(a) What is a public enterprise? (2 marks)
(b) Suggest TWO features of a public enterprise. (4 marks)
##
(a) A public enterprise refers to a firm that is wholly owned by the government or her agencies.
(2 marks)
(b) Features of a public enterprise:
- Capital is adequate and stable.
- It has better access to information and statistical data.
- It is able to provide reliable goods and services to the public at lower prices.
- It may have higher average production costs.
(Mark the FIRST TWO points only, 2 marks each)
##
@@a)nil,2@@
@@b)nil,4@@
[[]]
|!|1eESB0030000004|!|
Hongkong Post is a firm that is wholly owned by the government and provides postal services in Hong
Kong.
(a) Identify the type of enterprise Hongkong Post is. (2 marks)
(b) Suggest TWO features of this type of enterprise. (4 marks)
##
(a) Hongkong Post is a government department financed by trading fund, so it is a public enterprise.
(2 marks)
© Aristo Educational Press Ltd. 3-53
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(b) Features of a public enterprise:
- Capital is adequate and stable.
- It has better access to information and statistical data.
- It is able to provide more reliable goods and services at lower prices.
- It may have higher average production costs.
(Mark the FIRST TWO points only, 2 marks each)
##
@@a)nil,2@@
@@b)nil,4@@
[[]]
|!|1eESB0030000005|!|
Daniel opens a café. He is the only owner of the café and he provides all the capital needed. The café is
not a legal entity.
(a) State and define the form of business ownership of Daniel’s café. (3 marks)
(b) Suggest TWO reasons to explain why Daniel chooses this form of business ownership. (4 marks)
##
(a) It is a sole proprietorship. (1 mark)
A sole proprietorship is a firm owned by one individual who provides all the capital, makes all
important decisions and bears the risks of the business. (2 marks)
(b) Reasons for choosing a sole proprietorship:
- The legal set-up procedures are simple.
- Compared with a limited company, the profits tax rate of a proprietorship is lower.
- Financial information can be kept secret.
- The sole proprietor can have closer relationships with employees and customers.
- Decision-making is quick and flexible.
(Mark the FIRST TWO points only, 2 marks each)
##
@@a)nil,3@@
@@b)nil,4@@
[[]]
© Aristo Educational Press Ltd. 3-54
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eESB0030000006|!|
Mr. Yip and Mr. Shek are the only owners of a shop selling computer accessories and the shop is
subject to unlimited liability. Mr. Yip contributed 65% of the capital to the firm while Mr. Shek
contributed the remaining 35%.
(a) To which form of business ownership does their shop belong? (1 mark)
(b) What is the meaning of “unlimited liability”? (2 marks)
(c) Mr. Yip’s wife discovers that Mr. Yip can only get 50% of the firm’s profits and she thinks this is
unfair. She believes that Mr. Yip should get 65% of the profits. Is Mr. Yip’s wife necessarily
correct? Explain. (3 marks)
##
(a) Their shop belongs to a partnership. (1 mark)
(b) Unlimited liability means the liability of the owner is not limited to the amount of his or her initial
investment. The owners may need to use their personal assets to settle the firm’s outstanding
debts. (2 marks)
(c) Mr. Yip’s wife is not necessarily correct. Since the owners of a partnership would have prior
agreement on the ratio of sharing profit and loss, it is not a must for Mr. Yip to get 65% of the
profits although he has contributed 65% capital to the firm. (3 marks)
##
@@a)nil,1@@
@@b)nil,2@@
@@c)nil,3@@
[[]]
|!|1eESB0030000007|!|
There are several owners in a firm and their liability is unlimited. Later, the firm winds up due to a poor
decision made by one of the owners. Owner X said, “Most owners were not involved in the decision-
making process, so we do not need to bear the loss.” Is owner X right? Explain. (3 marks)
© Aristo Educational Press Ltd. 3-55
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
No. The firm belongs to a partnership. All partners are bound by the contracts signed by any partner(s).
They are legally responsible for those contracts, although the partners may not have prior agreement
before the contracts were signed. Therefore, they have to bear the loss although most of them were not
involved in making the decision. (3 marks)
##
@@x)nil,3@@
[[]]
|!|1eESB0030000008|!|
Joey is the only owner of a supermarket. She plans to expand her business through inviting new owners
to the supermarket in order to raise capital.
(a) To what form of business ownership does Joey’s supermarket belong if the supermarket is not a
legal entity before the invitation of new owners? (1 mark)
(b) To what form of business ownership does the supermarket belong after the invitation of new
owners if it is still not a legal entity? (1 mark)
(c) Besides the difference in the number of owners, state and explain TWO main differences between
the two forms of business ownership mentioned in part (a) and part (b). (4 marks)
##
(a) Joey’s supermarket is a sole proprietorship. (1 mark)
(b) Joey’s supermarket is a partnership. (1 mark)
© Aristo Educational Press Ltd. 3-56
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(c) Differences between a sole proprietorship and a partnership:
- Decision-making in a sole proprietorship is quick and flexible because the sole proprietor does
not need to get approval before making decisions. In a partnership, as there are at least two
partners, getting agreement is time-consuming and different people have different opinions,
decision-making is therefore less flexible in a partnership.
- In a sole proprietorship, the sole proprietor bears entire responsibility for the decisions he or she
makes. In a partnership, partners are legally responsible for the contracts signed by any
partner(s), although the partners may not have prior agreement before the contracts were signed.
- In a partnership, partners can share their own skills and this allows the firm to enjoy the benefits
of division of labour. In a sole proprietorship, the sole proprietor alone makes all the decisions.
- Any reasonable answer(s)
(Mark the FIRST TWO points only, 2 marks each)
##
@@a)nil,1@@
@@b)nil,1@@
@@c)nil,4@@
[[]]
|!|1eESB0030000009|!|
Mr. Cheung solely owns a grocery store and he has to bear all the liabilities of the firm. He is planning
to invite new partners and he is still subject to unlimited liability after the admission of new partners.
(a) To what form of business ownership does the grocery store belong before and after the invitation
of new partners? (2 marks)
(b) Suggest ONE possible motive for the invitation of new partners. (2 marks)
##
(a) It belongs to a sole proprietorship before the invitation of new partners. (1 mark)
It belongs to a partnership after the invitation of new partners. (1 mark)
© Aristo Educational Press Ltd. 3-57
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(b) Possible motives for introducing new partners:
- Partners can share their own skills and expertise in a partnership. This allows the firm to enjoy
the benefits of division of labour. Thus, the overall productivity of the firm can be higher.
- Capital can be raised among partners. Therefore, the firm can have a wider source of capital.
- Any reasonable answer(s)
(Mark the FIRST point only, 2 marks)
##
@@a)nil,2@@
@@b)nil,2@@
[[]]
|!|1eESB0030000010|!|
Suggest and explain TWO common features and ONE difference between a partnership and a sole
proprietorship. (6 marks)
##
Common features of a partnership and a sole proprietorship:
- Both of them are not a legal entity.
- Their owners have to bear unlimited liability.
- Their continuity is limited.
- The legal set-up procedures of them are relatively simpler than that of a limited company.
- The profits tax rate of them is lower than that of a limited company.
- They are not required to disclose their financial information to the general public.
(Mart the FIRST TWO points only, 2 marks each)
© Aristo Educational Press Ltd. 3-58
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
Differences between a partnership and a sole proprietorship:
- In a partnership, getting agreement is time-consuming as different people have different opinions.
Decision-making is less flexible in a partnership. In a sole proprietorship, decision-making is quick
and flexible as the sole proprietor does not need to get any approval before making decisions.
- In a sole proprietorship, the sole proprietor bears entire responsibility of the decisions that he or she
makes. In a partnership, partners are legally responsible for the contracts signed by any partner(s),
although the partners may not have prior agreement before the contracts were signed.
- In a partnership, partners can share their own skills and it allows the firm to enjoy the benefits of
division of labour. In a sole proprietorship, the sole proprietor alone makes all the decisions.
- Any reasonable answer(s)
(Mark the FIRST point only, 2 marks)
##
@@x)nil,6@@
[[]]
|!|1eESA0030000011|!|
ABC Co., Ltd. is a firm that publishes magazines.
(a) What does the abbreviation “Co., Ltd.” in the company name stand for? What is its implication?
(2 marks)
(b) Is it possible for ABC Co., Ltd. to be owned by one person only? Explain. (2 marks)
##
(a) “Co., Ltd.” stands for “company limited”. When a firm’s name contains “Co., Ltd.”, it is a limited
company. A limited company is a legal entity which its shareholders enjoy limited liability. A
limited company can raise capital by issuing shares. (2 marks)
(b) Yes. The minimum number of shareholders of a limited company is one.
(2 marks)
##
@@a)nil,2@@
@@b)nil,2@@
[[]]
© Aristo Educational Press Ltd. 3-59
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eESB0030000012|!|
Firm XYZ is currently a partnership. The partners are planning to change the form of business
ownership to a limited company. Which type of limited company is more suitable for firm XYZ if
(a) the shareholders want to keep the financial information of the company secret? (2 marks)
(b) the shareholders want to raise fund by issuing shares that are transferable on the stock exchange?
(2 marks)
##
(a) A private limited company is a more suitable arrangement for firm XYZ to operate under because
it is not required to disclose its financial statements to the public. A private limited company has
to disclose its financial statements to its shareholders only. (2 marks)
(b) A listed company is a more suitable arrangement for firm XYZ to operate under because only
shares of a listed company can be freely traded on the stock exchange. (2 marks)
##
@@a)nil,2@@
@@b)nil,2@@
[[]]
|!|1eESB0030000013|!|
The MTR Corporation Limited was listed in 2000.
(a) Identify its form of business ownership. (1 mark)
(b) Compare the form of business ownership of MTR to a private limited company in terms of
(i) capital-raising ability; and (2 marks)
(ii) risk of being taken over. (2 marks)
##
(a) It belongs to a listed company. (1 mark)
© Aristo Educational Press Ltd. 3-60
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(b) (i) A listed company can issue shares to the public while a private limited company cannot.
(2 marks)
(ii) Since the shares of a listed company can be freely traded on the stock exchange, the risk of
being taken over is higher. On the other hand, since the shares of a private limited company
can only be transferred with the consent of other shareholders, the risk of being taken over is
lower. (2 marks)
##
@@a)nil,1@@
@@b)nil,4@@
[[]]
|!|1eESB0030000014|!|
Country A plans to privatise (私有化) its postal service while Country B plans to nationalise (國有化) some
of its banks.
(a) Suggest ONE possible reason for turning the postal service from public ownership to private
ownership. (2 marks)
(b) Which basic economic problem(s) is/are involved when Country A turns the postal service from
public ownership to private ownership? (2 marks)
(c) Suggest ONE possible reason for Country B turning the banks from private ownership to public
ownership. (2 marks)
##
(a) Possible reasons:
- Privatising the postal service helps to lower the average production costs in Country A as
workers’ working incentive is usually higher in a private enterprise than in a public enterprise.
- Any reasonable answer(s)
(Mark the FIRST point only, 2 marks)
(b) The problem of “how to produce” is involved because this concerns the method of production.
(2 marks)
© Aristo Educational Press Ltd. 3-61
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(c) Possible reasons:
- Capital is more adequate and stable.
- Banks have better access to information and statistical data.
- Banks can provide reliable services to the pubic at lower prices.
- Any reasonable answer(s)
(Mark the FIRST point only, 2 marks)
##
@@a)nil,2@@
@@b)nil,2@@
@@c)nil,2@@
[[]]
|!|1eESB0030000015|!|
Explain the difference between a sole proprietorship and a public limited company in terms of
(a) the liability of owners. (2 marks)
(b) the legal status of the firm. (2 marks)
(c) the continuity of the firm. (2 marks)
(d) the disclosure of financial information. (2 marks)
##
(a) The owner of a sole proprietorship bears unlimited liability while the owners of a public limited
company enjoy limited liability. (2 marks)
(b) A sole proprietorship is not a legal entity while a public limited company is a legal entity.
(2 marks)
(c) The continuity of a sole proprietorship is limited while a public limited company enjoys lasting
continuity. (2 marks)
© Aristo Educational Press Ltd. 3-62
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(d) A sole proprietorship is not required by law to disclose its financial information to the general
public while a public limited company is required by law to disclose its financial statements to the
public regularly. (2 marks)
##
@@a)nil,2@@
@@b)nil,2@@
@@c)nil,2@@
@@d)nil,2@@
[[]]
|!|1eESB0030000016|!|
Benjamin and Daisy ran a bakery which went bankrupt last year.
(a) Under what circumstance would Benjamin and Daisy be required to use their assets to settle the
bakery’s outstanding debts? Explain. (2 marks)
(b) Suppose Benjamin and Daisy did not have to bear the bakery’s outstanding debts personally. Do
you think they had to disclose the bakery’s financial statements to the public? Explain. (3 marks)
(c) Six months after the bankruptcy, Daisy ran a new bakery herself with unlimited liability. Name
this form of business ownership and suggest TWO possible reasons to explain why she chose this
type of business ownership. (5 marks)
##
(a) When the bakery is not a legal entity, the owners will have to bear all legal responsibilities,
including debts and fines. (1 mark)
The owners may have to use personal property to settle outstanding debts. (1 mark)
(b) Since they did not have to bear the bakery’s outstanding debts personally, this implies the bakery
may be a private limited company or a public limited company. They may not have to disclose the
bakery’s financial statements to the public. (1 mark)
If the bakery was a private limited company, they had to disclose its financial statements to its
shareholders only. (1 mark)
If the bakery was a public limited company, they had to disclose its financial statements to the
public regularly. (1 mark)
© Aristo Educational Press Ltd. 3-63
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(c) The new bakery was a sole proprietorship. (1 mark)
Reasons for choosing a sole proprietorship:
- The legal set-up procedures of a sole proprietorship are relatively simpler than those of other
forms of business.
- Compared with a limited company, the profits tax rate of a sole proprietorship is lower.
- Financial information can be kept secret.
- The sole proprietor can have closer relationships with employees and customers.
- Decision-making is quick and flexible.
(Mark the FIRST TWO points only, 2 marks each)
##
@@a)nil,2@@
@@b)nil,3@@
@@c)nil,5@@
[[]]
|!|1eESB0030000017|!|
Study the following information about firm C and firm D.
Firm C Firm D
Number of owners 100 20
Disclosure of financial information to the public to the owners only
Liability limited unlimited
(a) Can firm D issue shares to the public? Explain. (2 marks)
(b) State ONE possible source of capital for each firm. Which firm has a wider source of capital?
(3 marks)
##
(a) Firm D is a partnership and therefore cannot issue shares to the public. (2 marks)
© Aristo Educational Press Ltd. 3-64
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(b) Possible sources of capital for firm C:
- issuing shares
- issuing bonds
- loans from banks
- Any reasonable answer(s)
(Mark the FIRST point only, 1 mark)
Possible sources of capital for firm D:
- loans from friends
- loans from banks
- Any reasonable answer(s)
(Mark the FIRST point only, 1 mark)
Firm C has a wider source of capital. (1 mark)
##
@@a)nil,2@@
@@b)nil,3@@
[[]]
|!|1eESB0030000018|!|
Compare the difference between ordinary shares and bonds in terms of the rate of return and the
repayment if the issuing company goes bankrupt. (4 marks)
##
The rate of return of ordinary shares is floating while the rate of return of bonds is fixed. (2 marks)
If the issuing company goes bankrupt, bondholders can claim repayment prior to ordinary shareholders.
(2 marks)
##
@@x)nil,4@@
[[]]
© Aristo Educational Press Ltd. 3-65
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eESB0030000019|!|
(a) A company chooses to issue bonds to raise capital. Suggest ONE possible reason to explain why it
chooses to issue bonds but not shares. (2 marks)
(b) Ray has just retired and received his pension. He would like to use this sum of money to make
investment by buying bonds. Suggest ONE possible reason to explain why he chooses to buy
bonds but not shares.
(2 marks)
##
(a) Since bondholders are only creditors of the company, they do not have voting rights during the
annual general meeting. Therefore, existing shareholders’ power of control over the company will
not be diluted. (2 marks)
(b) Bondholders can claim repayment prior to any shareholders if the company winds up. The risk
involved in buying bonds is lower than ordinary shares. Also, the rate of return of bonds is more
certain because they bear a fixed rate of interest irrespective of whether the company makes a
profit or not. Investing in bonds is a more suitable choice for a retiree. (2 marks)
##
@@a)nil,2@@
@@b)nil,2@@
[[]]
|!|1eESB0030000020|!|
Firm A is thinking of whether to issue ordinary shares or bonds in order to raise capital.
(a) To what type of business ownership does firm A belong? (1 mark)
(b) Explain the differences between ordinary shares and bonds in terms of their rate of return and
repayment to holders if the company goes bankrupt. (4 marks)
##
(a) Firm A belongs to a public limited company. (1 mark)
© Aristo Educational Press Ltd. 3-66
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(b) The rate of return on ordinary shares is floating while the rate of return on bonds is fixed.
(2 marks)
If the issuing company goes bankrupt, bondholders can claim repayment prior to ordinary
shareholders. (2 marks)
##
@@a)nil,1@@
@@b)nil,4@@
[[]]
|!|1eESB0030000021|!|
Fiona is choosing between buying bonds and ordinary shares of a listed company in Hong Kong. The
rate of return on bond is 3%, while the estimated dividend rate on shares is 6%.
(a) Suppose Fiona decides to buy shares. What is the opportunity cost of Fiona’s decision, given that
her only choices are those mentioned in the question? (2 marks)
(b) The estimated rate of return on shares is higher than that of bonds. Is holding shares necessarily
better than holding bonds? Suggest ONE reason to explain. (3 marks)
##
(a) Opportunity cost of a choice is the highest-valued option forgone. Her opportunity cost of buying
ordinary shares is the 3% return on bonds. (2 marks)
(b) No. (1 mark)
Possible reasons:
- Since the rate of return on shares is not fixed and depends entirely on the profits of the firm, the
rate of return is not certain.
- Ordinary shareholders are the last to claim repayment if the company winds up. The risk of
investment in buying ordinary shares would be higher than that in buying bonds.
- Any reasonable answer(s)
(Mark the FIRST point only, 2 marks)
##
@@a)cro,2@@
@@b)nil,3@@
[[]]
© Aristo Educational Press Ltd. 3-67
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Chapter 3 Ownership of Firms
|!|1eESB0030000022|!| (2012)
Ms. Cheng is the only owner of a trading company.
(a) To what type of business ownership does the trading company belong? (1 mark)
(b) Recently, Ms. Cheng considers turning the trading company into a private limited company with
her friend, Ms. Poon. What are the differences in the features of the business ownership before
and after the change? List any TWO of them. (4 marks)
##
(a) Sole proprietorship. (1 mark)
(b) Differences in the features of the business ownership between a sole proprietorship and a private
limited company:
- A private limited company is a legal entity while a sole proprietorship is not.
- A private limited company enjoys limited liability while a sole proprietorship does not.
- A private limited company enjoys lasting continuity while a sole proprietorship does not.
- A private limited company has more complicated set-up procedure than a sole proprietorship.
- A private limited company is subject to a higher profits tax rate than a sole proprietorship.
- Any reasonable answer(s)
(Mark the FIRST TWO point only, 2 marks each)
##
@@a)nil,1@@
@@b)nil,4@@
[[]]
|!|1eESB0030000023|!| (2014)
(a) Explain TWO differences between public enterprises and private enterprises. (4 marks)
(b) State TWO types of public enterprise in Hong Kong. (2 marks)
(c) Suggest ONE local example for each type of public enterprise in (b). (2 marks)
© Aristo Educational Press Ltd. 3-68
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
(a) - Public enterprises are owned by the government while private enterprises are owned by private
individuals.
- Public enterprises usually do not aim at profit maximisation while private enterprises usually
aim at profit maximisation.
- Any reasonable answers
(Mark the FIRST TWO points only, 2 marks each)
(b) - government departments
- government departments financed by trading funds
- public corporations
(Mark the FIRST TWO points only, 1 mark each)
(c) - Examples of government departments: Census and Statistics Department, Inland Revenue
Department (or any reasonable answer)
- Examples of government departments financed by trading funds: Hongkong Post, Companies
Registry (or any reasonable answer)
- Examples of public corporations: Airport Authority Hong Kong, Hong Kong Export Credit
Insurance Corporation (or any reasonable answer)
(Mark the FIRST TWO points only, 1 mark each)
##
@@a)nil,4@@
@@b)nil,2@@
@@c)nil,2@@
[[]]
|!|1eESB0030000024|!| (2014)
Mr. Chow is the only owner of a snack store. A few students got food poisoning after eating snacks in
his store. Mr. Chow is personally liable for the charges in this case.
(a) What type of business ownership does the snack store belong to? (1 mark)
(b) Later, Mr. Chow expands the business to a partnership with his friends. The original name of the
store is kept.
(i) Are the new and the old stores regarded as the same firm legally? Explain. (2 marks)
(ii) State ONE advantage and ONE disadvantage of being a partnership instead of the previous
type of ownership. (4 marks)
© Aristo Educational Press Ltd. 3-69
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
(a) sole proprietorship (1 mark)
(b) (i) No. Legally, the sole proprietorship will be dissolved. The partnership will be regarded as a
new firm. (2 marks)
(ii) An advantage:
- The sources of capital will be wider than in a sole proprietorship; a partnership can raise
capital by admitting new partners.
- Any reasonable answer
(Mark the FIRST point only, 2 marks)
A disadvantage:
- It takes time to reach a consensus if there is a divergence of views among partners.
- All partners are responsible for the outcomes of any wrong decisions made by any of the
partners.
- Any reasonable answer
(Mark the FIRST point only, 2 marks)
##
@@a)nil,1@@
@@b)nil,6@@
[[]]
|!|1eESB0030000025|!| (2014)
Mrs. Chan runs a dessert shop with her friends in the form of a partnership, instead of a private limited
company. Suggest TWO possible reasons for them choosing to be a partnership instead of a private
limited company and TWO disadvantages of being a partnership instead of a private limited company.
(4 marks)
© Aristo Educational Press Ltd. 3-70
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
##
Possible reasons:
- simple set-up procedure
- lower profits tax rate
- any reasonable answers
(Mark the FIRST TWO points only, 1 mark each)
Disadvantages:
- no independent legal status
- unlimited liability
- limited continuity
- limited sources of capital
- any reasonable answers
(Mark the FIRST TWO points only, 1 mark each)
##
@@x)nil,4@@
[[]]
|!|1eESB0030000026|!| (2014)
Cathay Pacific Airways (Hong Kong stock code: 0293) is an international airline based in Hong Kong.
It offers cargo and passenger services around the world.
(a) What type of business ownership does Cathay Pacific Airways belong to? (1 mark)
(b) State the features of this type of ownership in (a) in terms of the following:
(i) disclosure of accounting information (2 marks)
(ii) transfer of ownership (2 marks)
##
(a) public limited company/listed company (1 mark)
(b) (i) A public limited company is required to disclose its accounting information to the public
regularly. (2 marks)
(ii) The shares of a public limited company can be freely traded. (2 marks)
##
@@a)nil,1@@
@@b)nil,4@@
[[]]
© Aristo Educational Press Ltd. 3-71
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eESB0030000027|!| (2014)
(a) Which two types of business ownership have independent legal status? (2 marks)
(b) Besides having independent legal status, state TWO similarities and TWO differences between the
features of these two types of ownership. (4 marks)
##
(a) private limited company and public limited company (2 marks)
(b) Similarities:
- limited liability
- lasting continuity
- separation of ownership and management
- higher profits tax rate than sole proprietorship and partnership
- complicated set-up procedure
- any reasonable answers
(Mark the FIRST TWO points only, 1 mark each)
Differences:
- The number of shareholders in a private limited company ranges from 1 to 50 while that of a
public limited company is 1 or above with no upper limit.
- A private limited company cannot issue shares and bonds to the public while a public limited
company can.
- Shares of a private limited company can only be transferred with the consent of other
shareholders while those of a public limited company can be freely transferred.
- A private limited company has to disclose its accounting information to its shareholders only
while a public limited company is required to disclose its accounting information to the public
regularly.
- Any reasonable answers
(Mark the FIRST TWO points only, 1 mark each)
##
@@a)nil,2@@
@@b)nil,4@@
[[]]
© Aristo Educational Press Ltd. 3-72
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eESB0030000028|!| (2014)
Mr. Au is the young owner of a boutique. He plans to invest part of the company’s profits either in
shares or bonds issued by a listed company.
(a) Suggest TWO reasons to explain why shares could be a better choice than bonds to Mr. Au.
(4 marks)
(b) Suppose the dividend rate is lower than Mr. Au’s expectations. Explain whether this would affect
Mr. Au’s opportunity cost of buying shares. (3 marks)
##
(a) - Mr. Au has voting rights in the annual general meetings.
- If the company makes huge profits, the dividend rate may be higher.
- Any reasonable answers
(Mark the FIRST TWO points only, 2 marks each)
(b) No. (1 mark)
This would only affect the value of buying shares, but not the opportunity cost. (2 marks)
##
@@a)nil,4@@
@@b)cro,3@@
[[]]
© Aristo Educational Press Ltd. 3-73
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
Long Questions
|!|1eELB0030000001|!|
Kimmy and Mandy jointly opened a café.
(a) Before opening the café, Kimmy worked for the Immigration Department and Mandy worked for
Hongkong Post.
(i) What types of enterprise(s) are their former employers? (2 marks)
(ii) What is the difference in sources of financing between the Immigration Department and
Hongkong Post? (2 marks)
(b) Based on the given information, suggest TWO possible forms of business ownership of the café.
(2 marks)
(c) Later the café went bankrupt. Kimmy and Mandy had to sell their own flats to pay the debt.
(i) Given this information, to which type of business ownership did the café belong? Explain.
(3 marks)
(ii) Suggest TWO possible reasons to explain why they chose this form of ownership. (4 marks)
##
(a) (i) Immigration Department is a government department, so it is a public enterprise. (1 mark)
Hongkong Post is a government department financed by trading fund, so it is a public
enterprise. (1 mark)
(ii) Immigration Department is directly financed by the government. (1 mark)
Hongkong Post is financed by its trading fund. (1 mark)
(b) Possible forms of business ownership of the café:
- partnership
- private limited company
- public limited company
(Mark the FIRST TWO points only, 1 mark each)
© Aristo Educational Press Ltd. 3-74
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(c) (i) The café belonged to a partnership. (1 mark)
Kimmy and Mandy has to bear unlimited liability because they needed to use their personal
property to settle outstanding debts. (2 marks)
(ii) Possible reasons for choosing a partnership:
- The legal set-up producers of a partnership are relative simpler than that of a limited
company.
- The profits tax rate of a partnership is lower than that of a limited company.
- Financial information can be kept secret.
- Partners can share their own skills and expertise in a partnership.
(Mark the FIRST TWO points only, 2 marks each)
##
@@a)nil,4@@
@@b)nil,2@@
@@c)nil,7@@
[[]]
|!|1eELB0030000002|!|
Peter has worked in an accounting firm for 20 years. He decides to open an accounting firm of his own.
(a) What is the opportunity cost of Peter leaving the present accounting firm and starting his own
business? (2 marks)
(b) Peter is the only owner of the firm he sets up.
(i) To what type of business ownership does Peter’s firm belong? State TWO features of this
type of ownership. (5 marks)
(ii) State TWO differences between this type of ownership and a public limited company.
(4 marks)
(c) To enhance workers’ spirits, Peter decides to offer free distilled water and snacks to his
employees. Explain whether the free distilled water and snacks are free goods to society.(4 marks)
##
(a) His opportunity cost of leaving the present accounting firm and establishing one by himself is the
income received from the present job. (2 marks)
© Aristo Educational Press Ltd. 3-75
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(b) (i) It belongs to a sole proprietorship. (1 mark)
Features of a sole proprietorship:
- It is not a legal entity.
- The owner has to bear unlimited liability.
- Its continuity is limited.
- The legal set-up procedures are relatively simpler than other forms of business.
- Compared with a limited company, the profits tax rate of it is lower.
- Financial information can be kept secret.
- The sole proprietor is able to have closer relationships with employees and customers.
- Decision-making is prompt.
(Mark the FIRST TWO points only, 2 marks each)
(ii) Differences between a sole proprietorship and a public limited company:
- A sole proprietorship is not a legal entity while a public limited company is a legal entity.
- Owner of a sole proprietorship bears unlimited liability while owners of a public limited
company enjoy limited liability.
- The continuity of a sole proprietorship is limited while a public limited company enjoys
lasting continuity.
- The set-up procedures of a sole proprietorship are simpler than those of a public limited
company.
- The profits tax rate of a sole proprietorship (15%) is lower than that of a public limited
company (16.5%) in Hong Kong for the year of assessment 2008/09.
- A sole proprietorship is not required to disclose its financial information to the public while
a public limited company is required to disclose its financial statements to the public
regularly.
- Decision-making in a sole proprietorship is quick and flexible while decision-making in a
public limited company is less flexible and slower since getting agreement is time-
consuming.
- Ownership and management are not separated in a sole proprietorship while ownership and
management are usually separated in a public limited company.
- The sources of capital are limited in a sole proprietorship while the source of capital is
wider in a public limited company since it can issue bonds and shares to the public in order
to raise capital.
(Mark the FIRST TWO points only, 2 marks each)
© Aristo Educational Press Ltd. 3-76
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(c) The free distilled water and snacks are not free goods. (1 mark)
Free goods refer to those goods that people do not prefer more of as the quantity available is
sufficient to satisfy all human wants. (1 mark)
However, people prefer more distilled water and snacks as the quantity available is not sufficient
to satisfy all human wants. Therefore, the free distilled water and snacks are not free goods, but
economic goods. (2 marks)
##
@@a)cro,2@@
@@b)nil,9@@
@@c)cro,4@@
[[]]
|!|1eELB0030000003|!|
Jason works for the Education Bureau.
(a) To which type of enterprise does the Education Bureau belong? State TWO features of this type of
enterprise. (5 marks)
(b) Jason goes to work by bus every day. The bus service is provided by the Kowloon Motor Bus
Company (1933) Limited (KMB).
KMB is a subsidiary of Transport International Holdings Limited. State the type of ownership of
Transport International Holdings Limited and TWO features of this type of ownership. (5 marks)
(c) Jason plans to invest some of his personal savings on shares or bonds. One of his friends suggests
that he should choose bonds. Suggest TWO reasons to support his friend’s view. (4 marks)
##
(a) The Education Bureau is a government department, so it belongs to a public enterprise. (1 mark)
Features of a public enterprise:
- Capital is adequate and stable.
- It has better access to information and statistical data.
- It is able to provide reliable goods and services to the public at lower prices.
- It may have higher average production costs.
(Mark the FIRST TWO points only, 2 marks each)
© Aristo Educational Press Ltd. 3-77
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(b) It belongs to a listed company / public limited company. (1 mark)
Features of a listed company / public limited company:
- There is at least 1 owner with no upper limit.
- A listed company / public limited company is a legal entity.
- The owners of a listed company / public limited company can enjoy limited liability.
- A listed company / public limited company has lasting continuity.
- The ownership and management are separated.
- The profits tax rate of a listed company / public limited company (16.5%) is higher than that of
the sole proprietorship and partnership (15%) in Hong Kong for the year of assessment 2008/09.
- The set-up procedures of a listed company / public limited company are more complicated than
other forms of business ownership.
- A listed company / public limited company has to disclose its financial statements to the public
regularly.
▲ The shares of a listed company can be traded freely on the stock exchange.
(▲ This feature is not applicable to public limited companies which are not listed.)
(Mark the FIRST TWO points only, 2 marks each)
(c) Bondholders can claim repayment prior to any shareholders if the company winds up. The risk
involved in buying bonds is lower than that in buying ordinary shares. (2 marks)
The rate of return on bonds is more certain because they bear a fixed rate of interest irrespective
of whether the company makes a profit or not. (2 marks)
##
@@a)nil,5@@
@@b)nil,5@@
@@c)nil,4@@
[[]]
© Aristo Educational Press Ltd. 3-78
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
|!|1eELB0030000004|!|
NSS Group is a firm which has business in the fields of banking, property development, catering and
publishing. It went listed a few months ago. Two weeks before listing, many people queued up to get
the forms to subscribe for its shares. Most of them were housewives and old people.
(a) The forms were distributed for free. Were they free goods? Explain. (4 marks)
(b) Use the concept of opportunity cost to explain why most people queuing up for the forms were
housewives and old people. (2 marks)
(c) To which form of ownership does NSS Group belong? State TWO of its features. (5 marks)
(d) NSS Group was established by Daniel Chan. Daniel started his business all by himself 10 years
ago. At that time he only had to acquire a Business Registration Certificate to start his business.
Suggest TWO possible reasons to explain why the form of ownership that chosen by Daniel 10
years ago was not ideal when compared with the present form of business ownership. (4 marks)
##
(a) The forms were not free goods. (1 mark)
Free goods refer to those goods that people do not prefer more of as the quantity available is
sufficient to satisfy all human wants. (1 mark)
However, people preferred more forms as the quantity available was not sufficient to satisfy all
human wants. Therefore, the forms were not free goods, but economic goods. (2 marks)
(b) Opportunity cost of a choice is the highest-valued option forgone. Most people queuing up for the
forms were housewives and old people because their highest-valued alternative use of time
involved in queuing up for the forms was lower than that of people who have a job. (2 marks)
© Aristo Educational Press Ltd. 3-79
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(c) It belongs to a listed company / public limited company. (1 mark)
Features of a listed company / public limited company:
- There is at least 1 owner with no upper limit.
- A listed company / public limited company is a legal entity.
- The owners of a listed company / public limited company can enjoy limited liability.
- A listed company / public limited company has lasting continuity.
- The ownership and management are separated.
- The profits tax rate of a listed company / public limited company (16.5%) is higher than that of
the sole proprietorship and partnership (15%) for the year of assessment 2008/09 in Hong Kong.
- The set-up procedures of a listed company / public limited company are more complicated than
other forms of business ownership.
- A listed company / public limited company has to disclose its financial statements to the public
regularly.
▲ The shares of a listed company can be traded freely on the stock exchange.
(▲ This feature is not applicable to public limited companies which are not listed.)
(Mark the FIRST TWO points only, 2 marks each)
© Aristo Educational Press Ltd. 3-80
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(d) The form of business ownership that Daniel chose 10 years ago was probably a sole
proprietorship.
Possible reasons:
- A sole proprietorship is not a legal entity. Daniel is personally liable for all charges incurred by
the firm. However, since a listed company is a legal entity, he is not personally liable for all
charges incurred by the firm.
- Daniel has to bear unlimited liability if the firm is a sole proprietorship. However, he enjoys
limited liability if the firm is a listed company.
- The continuity of a sole proprietorship is limited which hinders long-term planning and
development of the firm. However, a listed company enjoys lasting continuity. This is
favourable to the long-term planning and development of the firm.
- The sources of capital of a sole proprietorship are limited. This hinders the expansion of the
firm. A listed company has wider source of capital since it can issue bonds and shares to the
public. This is favourable to the expansion of the firm.
- Any reasonable answer(s)
(Mark the FIRST TWO points only, 2 marks each)
##
@@a)cro,4@@
@@b)cro,2@@
@@c)nil,5@@
@@d)nil,4@@
[[]]
|!|1eELB0030000005|!| (2012)
Johnson, Donald and Samuel are running a book shop. The book shop is currently facing a financial
difficulty, but the three owners have no other ways to raise capital except by using their personal assets.
(a) To what type of business ownership does the book shop belong? (1 mark)
(b) On behalf of the book shop, Johnson signed a contract with a magazine publisher without the
consent of Donald and Samuel. Explain whether Donald and Samuel need to be legally
responsible for the contract signed by Johnson. (3 marks)
© Aristo Educational Press Ltd. 3-81
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(c) Suppose the three owners want to have a wider source of capital by changing the type of business
ownership.
(i) What type of business ownership should they turn their book shop into? (1 mark)
(ii) Other than the capital raising ability, list TWO advantages of the type of business ownership
in (i) over the existing type to the owners. (4 marks)
(d) To boost sales, the book shop is considering the following measures:
1. Offering a 10% discount to students in uniform
2. Widening the variety of books sold in the book shop
Explain the basic economic problem illustrated in each of the above measures. (4 marks)
##
(a) Partnership. (1 mark)
(b) Yes. (1 mark)
For a partnership, all partners are bound by the contracts signed by any partner. They are legally
responsible for those contracts, even though the partners may not have prior agreement before the
contracts were signed. (2 marks)
(c) (i) Limited company. (1 mark)
(ii) Advantages include:
- Owners of a partnership bear unlimited liability while owners of a limited company enjoy
limited liability. This means that owners of a limited company are not personally responsible
for the outstanding debts of the company.
- A partnership is not a legal entity while a limited company is a legal entity. This means that
owners of a limited company do not have to bear legal responsibility for the company.
- Any reasonable answer(s)
(Mark the FIRST TWO points only, 2 marks each)
© Aristo Educational Press Ltd. 3-82
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(d) The problem of “for whom to produce” is illustrated in measure 1. As only students in uniform
can enjoy the discount, this concerns the criteria of allocating the goods and it illustrates the “for
whom to produce” problem. (2 marks)
The problem of “what to produce” is illustrated in measure 2. With limited space and resources,
the owners have to decide what sorts of books should be sold in the book shop. (2 marks)
##
@@a)nil,1@@
@@b)nil,3@@
@@c)nil,5@@
@@d)nil,4@@
[[]]
|!|1eELB0030000006|!| (2014)
ABC Company plans to issue $10 million of bonds to the public to raise capital.
(a) What type of business ownership does ABC Company belong to? (1 mark)
(b) If ABC Company goes bankrupt, are its shareholders personally responsible for the outstanding
debts? Explain. (2 marks)
(c) Suggest a possible reason to explain why ABC Company chooses to issue bonds instead of
ordinary shares to raise capital. (2 marks)
(d) Mrs. Ho, a retired person, considers investing some of her pension either in shares or bonds issued
by ABC Company. She chooses to buy bonds finally.
(i) Explain TWO advantages for Mrs. Ho of buying bonds instead of shares issued by the
company. (4 marks)
(ii) Explain with an example when the opportunity cost of choosing to invest in bonds would
increase. (3 marks)
##
(a) public limited company/listed company (1 mark)
(b) No. Their liability is limited to the amount of their investment in the company. (2 marks)
(c) - The existing shareholders’ control over the company will not be diluted.
- This will not increase the risk of the company being taken over by others.
- Any reasonable answer
(Mark the FIRST point only, 2 marks)
© Aristo Educational Press Ltd. 3-83
HKDSE Economics in Life – Microeconomics 1
Chapter 3 Ownership of Firms
(d) (i) - The rate of return from bonds is more certain.
- Bondholders can claim repayment prior to shareholders if the company winds up.
Investment risk is lower.
- Any reasonable answers
(Mark the FIRST TWO points only, 2 marks each)
(ii) The opportunity cost of investing in bonds is the return from buying shares issued by the
company. If the dividend rates of shares increase, the opportunity cost of investing in bonds
increases. (3 marks)
##
@@a)nil,1@@
@@b)nil,2@@
@@c)nil,2@@
@@d)nil,4&cro,3@@
[[]]
© Aristo Educational Press Ltd. 3-84
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