cmp upgrade 2010/11 - actuarial education company upgrades/ct7-cmp... · 2010-09-20 · the core...

CT7: CMP Upgrade 2010/11

The Actuarial Education Company © IFE: 2011 Examinations

Subject CT7

CMP Upgrade 2010/11

CMP Upgrade This CMP Upgrade lists the main changes to the textbook, the Q&A Bank and the X assignments since last year. New edition of the textbook The Core Reading for the 2011 exams is selected chapters from the new edition of the textbook, ie Economics for Business (fifth edition) by John Sloman, Kevin Hinde and Dean Garratt, published in 2010 (ISBN: 978-273-72233-5). The new edition of the textbook updates a number of sections - in particular, macroeconomic policy in the light of the credit crunch. The 2011 exams will be based on this edition, so we recommend that you use this edition to prepare for the 2011 exams. Course Notes The changes in the textbook have necessitated many changes to the ActEd Course Notes. Therefore it has not been possible to provide replacement pages for all of the changes in the Course Notes. There are two options open to you: 1. You can buy a full replacement set of up-to-date Course Notes at a significantly

reduced price if you have previously bought the full price Course Notes in this subject. Please see our 2011 Student Brochure for more details.

2. You can use this upgrade, along with the fifth edition of the textbook, to update

your 2010 Course Notes. The table in Section 2 gives details of the main changes from the fourth to the fifth editions, along with page references for each module.


© IFE: 2011 Examinations The Actuarial Education Company

Q&A Bank and X assignments The tables on the following pages give details of important changes to the Q&A Bank and the X assignments. Some questions have been deleted as they are no longer relevant and some have been amended in the light of the new material. In addition, some new questions have been included to test your understanding of the new material. Replacement pages and additional pages are provided where appropriate.



1 Changes to the Syllabus objectives and Core Reading There have been no changes to the syllabus objectives. The Core Reading consists of references to material from: Economics for Business. Sloman, J., Hinde, K. and Garratt, D. 5th ed. Prentice Hall 2010. ISBN:978-0-273-72233-5 The list of further reading has been updated. It now reads as follows: Economics. Begg, D. K. H.; Fischer, S.; Dornbusch, R. 8th ed. McGraw-Hill, 2005. ISBN: 9780077107758 Economics. Lipsey, R. G.; Chrystal, K. A. 11th ed. Oxford University Press, 2007. ISBN: 9780199286416 Economics. Mankiw, N.G.; Taylor, M. P. Thomson, 2006. ISBN: 9781844801336 Economics. Parkin, M.; Powell, M.; Matthews, K. 7th ed. Pearson Education, 2007. ISBN: 9780132041225 Economics. Sloman, J. 6th ed. FT Prentice Hall, 2006. ISBN: 9780273705123 Essentials of economics. Sloman, J. 4th ed. FT Prentice Hall, 2006. ISBN: 9780273708810 Economics. Krugman, P.; Wells, R.; Graddy, K. European ed. Worth, 2007. ISBN: 9780716799566



2 Updating your 2010 Course Notes The following table gives details of the main changes from the fourth to the fifth editions, along with page references for each module. The table assumes that you have:

• the fifth edition of the textbook

• the 2010 version of the ActEd Course Notes. The table sets out for each module:

• the chapter and page references in the fifth edition of the textbook

• the details of any significant changes

• the page references in the fifth edition for the significant changes

• the page references in the 2010 Course Notes where the significant changes occur/fit in.

For example, using your ActEd Course Notes for Module 8:

• on page 1, you can alter the page references for Chapter 12 from page 240 - 265 to pages 234 - 258 and for Chapter 13 from pages 269 - 290 to pages 263 - 284

• you can read the new material on “single-move games” on page 250 of the textbook and make a note of this on page 18 of your Course Notes

• you can read the new material on “multiple-move games” on page 252 of the textbook and make a note of this on page 21 of your Course Notes.



Module Chapter and page references for whole module in Fifth

Edition of the textbook

Significant change to the module Page reference for significant change in the Fifth Edition

of the textbook

Page number(s) in appropriate

module of Course Notes 2010

1 Chapter 2, pages 18 - 28 none



4 Chapter 6, Sections 1 - 2, pages 107 - 120 (plus additional unchanged Core Reading)

none




8 Chapter 12, pages 234 - 258 Optional: Chapter 13, pages 263 - 284

Single-move games.

Multiple-move games (including tit-for-tat).

Page 250

Page 252

Page 18

Page 21


10 Chapter 15, pages 298 - 321 Chapter 23, Section 1, pages 497 - 501

none



Module Reference for module Significant change Reference for change Page in CN 2010

11 Chapter 17, pages 339 - 357 Optional: Chapter 18, pages 361 - 388

none

12 Chapter 20, Sections 1 - 4, pages 413 - 430 Optional: Chapter 20, Section 5, pages 430 - 440 Chapter 22, Sections 1 - 2, pages 464 - 484

none

13 Chapter 21, Sections 1 - 2, pages 441 - 456 Optional: Chapter 21, Section 3, pages 457 - 463

The Treaty of Amsterdam has been superseded by the Treaty of Lisbon.

Page 442 Pages 3, 4 and 5

14 Chapter 31, Sections 1 - 3, pages 705 - 718 Optional: Chapter 31, Section 4, pages 718 - 722

Section 1 has been extended.

Section 2 has been rewritten.

Industrial policy has been removed and incorporated into “interventionist” supply-side policies. This is now in Section 3 of the text.

Pages 705 - 709

Pages 709 - 715

Pages 715 - 718

Pages 3 - 4

Pages 5 - 8

Page 8

15 Chapter 24, pages 523 - 542 New diagram showing the welfare effects of a tariff.

Page 534 Page 12




16 Chapter 27, pages 596 - 615 The effective exchange rate. Page 601 Page 9

17 Chapter 26, including appendix, pages 561 - 595 Chapter 29, Section 1, pages 647 - 651

The second measurement of trend output has changed to a “production function approach”.

Page 566 Page 15

18 Chapter 28, pages 616 - 645

Chapter 29, Section 2, pages 651 - 654

Types of banks.

Banks’ balances at the Bank of England.

Liquidity and profitability including: • maturity gap • capital adequacy.

Secondary marketing and securitisation including: • Special Purpose Vehicle (SPV) • Collateralised Debt Obligations

(CDOs) • sub-prime debt.

The section on bigger banks has been removed.

Prudential control (as a function of the Bank of England).

Section on parallel money markets extended.

Page 618

Page 621

Pages 622 - 625 Page 624 Page 624

Pages 625 - 626 & Box 28.3 Page 625 Page 625 Page 626

Page 628

Page 630 & Box 28.4

Page 4

Page 4

Page 5 Page 5 Page 5

Page 5 Page 5 Page 5 Page 5

Page 6

Page 6

Page 7




18 (cont)

Chapter 28, pages 616 - 645

Chapter 29, Section 2, pages 651 - 654

Selling gilts to the banks as an additional way of financing the PSNCR.

The relationship between the PSNCR and the money supply has been removed.

Section 29.2 has been rewritten.

Page 639

Pages 651 - 654

Page 10

Page 11

Pages 17 - 18

19 Chapter 29, Sections 3 - 5, pages 654 - 675

none

20 Chapter 30, pages 677 - 704 Chapter 31, Section 1, pages 705 - 709

Capital and current spending.

Final spending and transfers.

Controlling the liquidity of banks has been added as a medium and long-term measure of controlling the money supply, including: • statutory minimum reserve ratio.

Quantitative easing

Political behaviour as a point in favour of rule-based policy.

Constrained discretion

Page 681

Page 681

Page 689 Page 689

Page 697 & Box 30.4

Page 698

Page 700

Page 3

Page 3

Page 8 Page 8

Page 9

Page 12

Page 14



3 Changes to the Q&A Bank

Question Details of any changes

Question 3B.16 Please delete this question as it is no longer relevant.

Question 3B.39 Please delete this question as it is no longer relevant.

Questions 3B.48 and 3B.49

Please add the new questions and solutions at the end of your Q&A Bank Part 3. Additional question pages (pages 23-24) and additional solution pages (pages 37-38) are provided at the end of this pack.

Question 4B.50

In Part (ii) please change “method” to “methods” and increase the marks to 4. In the solution, in the second paragraph, please change “commercial banks” to “commercial banks’ purchase of Treasury bills”. At the end of the solution, please add: “In addition, the Bank of England could impose a statutory minimum reserve ratio on the banks, above the level that banks would otherwise choose to hold. This would reduce bank lending and hence credit creation. [1]”

Question 4B.52

In the solution to Part (i), in the final bullets, please add: “quantitative easing, an aggressive form of open market operations, which involves the central bank purchasing large quantities of existing securities (private-sector debt and government debt) in exchange for cash [½]”

Question 4A.19, 4B.54 and 4B.55

Please add the new questions and solutions at the end of your Q&A Bank Part 4. Additional question pages (pages 29-30) and additional solution pages (pages 51-52) are provided at the end of this pack.




Question 5.16

Please amend this question to read: Which of the following is NOT an aim of supply-side policy?

A to increase output for any given level of prices B to increase output for any given level of demand C to decrease prices for any given level of output D to shift the aggregate supply curve to the right [1½] In the solution, please delete the explanation of the solution and insert: “A, C and D are all aims of supply-side policy.”



4 Changes to the X assignments A number of changes have been made to the X assignments. Most of these changes do not lend themselves to inclusion in the Upgrade document because they do not affect your chance of success in the Subject CT7 exam. However, we do include some improvements to solutions and changes in questions and/or solutions resulting from the changes in the Core Reading. We only accept the current version of assignments for marking, ie those published for the session leading to the 2011 exams. If you wish to submit your script for marking but only have an old version, then you can order the current assignments free of charge but only if you have purchased the same paper in the same subject the previous year (ie sessions leading to the 2010 exams), and have purchased marking for the 2011 session.


X1.18 Please change Option B to read: “use more labour and less capital.”

X1.29 Please preface the question with: “Using the concepts of marginal cost and marginal revenue, …”.

X2.28

We have removed the question on globalisation to Assignment X3 because this topic is now in Part 3 of the course. We have replaced it in Assignment X2 with a question on products and marketing. Replacement question pages (pages 7-8) and solution pages (pages 15 -1 8) are provided at the end of this pack. Please retain the globalisation question and solution as it is now in Assignment X3.

X3.14 Please change “industrial” to “supply-side” in both the question and the solution.

X3.35

The question on exchange rates has been replaced by the question on globalisation from Assignment X2. Although the question on exchange rates is not required for Assignment X3, it is still a relevant question and you might wish to use this as additional question practice.




X4.38

Please add the following question, which has been included to cover the new material in Module 18. “The process of repackaging assets into marketable securities is known as:

A secondary action. B speculation. C securitisation. D subcontracting. [1½]” (X4.21 has been removed to make room for this question, but it is still a relevant question. There has also been some renumbering of the multiple-choice questions.) The solution to this question is Option C.

X4.34

Please replace “two” with “main” in the question and add the following to the solution: “Discretionary fiscal policy could operate within limits. A policy of constrained discretion is one that operates within a set of principles or rules (either informal or enshrined in law), eg public sector budgets should balance over the business cycle. It is argued that this rule-based approach still leaves scope for automatic fiscal stabilisers and for discretionary changes in policy.”



5 Other tuition services

In addition to this CMP Upgrade you might find the following services helpful with your study.

5.1 Study material We offer the following study material in Subject CT7: • Series Y Assignments • ASET (ActEd Solutions with Exam Technique) and Mini-ASET • Flashcards • Mock Exam A and Mock Exam B • Revision Notes. For further details on ActEd’s study materials, please refer to the 2011 Student Brochure, which is available from the ActEd website at www.ActEd.co.uk.

5.2 Tutorials We offer the following tutorials in Subject CT7:

• a set of Regular Tutorials (usually lasting two or three full days)

• a Block Tutorial (lasting two or three full days)

• a Revision Day (lasting one full day). For further details on ActEd’s tutorials, please refer to our latest Tuition Bulletin, which is available from the ActEd website at www.ActEd.co.uk.

5.3 Marking You can have your attempts at any of our assignments or mock exams marked by ActEd. When marking your scripts, we aim to provide specific advice to improve your chances of success in the exam and to return your scripts as quickly as possible. For further details on ActEd’s marking services, please refer to the 2011 Student Brochure, which is available from the ActEd website at www.ActEd.co.uk.



6 Feedback on the study material

ActEd is always pleased to get feedback from students about any aspect of our study programmes. Please let us know if you have any specific comments (eg about certain sections of the notes or particular questions) or general suggestions about how we can improve the study material. We will incorporate as many of your suggestions as we can when we update the course material each year. If you have any comments on this course please send them by email to [email protected] or by fax to 01235 550085.

CT7: Q&A Bank Part 3 – Questions Page 23


Part 3 – Additional Questions Question 3B.48

Following the imposition of a tariff: A the consumer surplus increases, the producer surplus increases and the

government surplus increases.

B the consumer surplus increases, the producer surplus increases and the government surplus decreases.

C the consumer surplus decreases, the producer surplus increases and the government surplus increases.

D the consumer surplus decreases, the producer surplus decreases and the government surplus increases. [1½]

Question 3B.49

Explain why market-orientated supply-side policy may be superior to interventionist supply-side policy, and describe three possible market-orientated supply-side policies. [5]


All study material produced by ActEd is copyright and issold for the exclusive use of the purchaser. The copyright

is owned by Institute and Faculty Education Limited, asubsidiary of the Institute and Faculty of Actuaries.

You may not hire out, lend, give out, sell, store or transmitelectronically or photocopy any part of the study material.

You must take care of your study material to ensure that itis not used or copied by anybody else.

Legal action will be taken if these terms are infringed. Inaddition, we may seek to take disciplinary action through

the profession or through your employer.

These conditions remain in force after you have finishedusing the course.

CT7: Q&A Bank Part 3 – Solutions Page 37


Part 3 – Additional Solutions Solution 3B.48

Answer: C The imposition of a tariff increases the price to the consumers, so the consumer surplus decreases. The producers receive the higher price and extend their supply, so the producer surplus increases. The government receives revenue from the tariff on imported goods, so the government surplus increases. [1½] Solution 3B.49

Market-orientated supply-side policies may be superior to interventionist supply-side policies because interventionist policies might:

• increase bureaucracy and waste

• reduce market incentives, eg the incentive to work and invest

• allow inefficient firms to survive

• change with changes in governments, making it difficult for firms to plan ahead. [2]

Market-orientated supply-side policies include (only three required to score full marks):

• reducing the tax burden on workers, savers and firms to increase the incentive to work, save and invest [1]

• keeping the minimum wage low (or removing it altogether) to reduce labour costs, increase profits and hence increase investment [1]

• reducing the monopoly power of trade unions to reduce labour costs and hence increase investment [1]

• reducing welfare payments to reduce/remove the “poverty trap” and increase the incentive to work [1]

• encouraging competition, eg by privatisation and deregulation, to increase national output

• removing trade barriers to allow goods to be bought from the cheapest source [1]

• removing restrictions on international capital movements to allow capital to be allocated to the projects in which it will be most effective. [1]

[Maximum 5]


All study material produced by ActEd is copyright and issold for the exclusive use of the purchaser. The copyright

is owned by Institute and Faculty Education Limited, asubsidiary of the Institute and Faculty of Actuaries.

You may not hire out, lend, give out, sell, store or transmitelectronically or photocopy any part of the study material.

You must take care of your study material to ensure that itis not used or copied by anybody else.

Legal action will be taken if these terms are infringed. Inaddition, we may seek to take disciplinary action through

the profession or through your employer.

These conditions remain in force after you have finishedusing the course.

CT7: Q&A Bank Part 4 – Questions Page 29


Part 4 – Additional Questions Section A Question 4A.19

Fill in the gaps, using eight of the following nine terms: • capital adequacy • Collateralised Debt Obligations (CDOs) • liquidity • maturity gap • profitability • secondary marketing • securitisation • Special Purpose Vehicle (SPV) • sub-prime debt Over the years prior to the “credit crunch” there had been an explosion of credit. Banks had attempted to increase _______________ by decreasing _______________ and hence increasing the _______________. One way of reconciling the banks’ two conflicting aims was the use of _______________ of assets, ie the sale of assets before maturity to another institution. The main method for the sale of assets was through the process of _______________. This process involved bundling up assets, such as mortgages, and selling them to an intermediary that the bank set up, known as a _______________. This intermediary financed the purchase of these assets by the sale of bonds to other financial institutions. These bonds were known as _______________. This process of pooling assets encouraged banks to take greater risks, and many banks reduced their lending criteria, eg by granting mortgages to lower-income households and increasing income multiples. These loans were all bundled and re-sold. When there was an increase in the number of defaults on _______________, banks that had bought re-packaged debt began to be concerned about their exposure to it. Banks became reluctant to lend and the “credit crunch” was born!

CT7: Q&A Bank Part 4 – Questions


Section B Question 4B.54

A bank’s decision to increase its reserve balances at the Bank of England whilst holdings of other liquid assets are held constant will: A increase the liquidity ratio and increase the maturity gap. B increase the liquidity ratio and decrease the maturity gap. C decrease the liquidity ratio and increase the maturity gap. D decrease the liquidity ratio and decrease the maturity gap. [1½] Question 4B.55

Define securitisation and discuss its effects on the banking system. [6]

CT7: Q&A Bank Part 4 – Solutions Page 51


Part 4 – Additional Solutions Section A Solution 4A.19 Over the years prior to the “credit crunch” there had been an explosion of credit. Banks had attempted to increase profitability by decreasing liquidity and hence increasing the maturity gap. One way of reconciling the banks’ two conflicting aims was the use of secondary marketing of assets, ie the sale of assets before maturity to another institution. The main method for the sale of assets was through the process of securitisation. This process involved bundling up assets, such as mortgages, and selling them to an intermediary that the bank set up, known as a Special Purpose Vehicle (SPV). This intermediary financed the purchase of these assets by the sale of bonds to other financial institutions. These bonds were known as Collateralised Debt Obligations (CDOs). This process of pooling assets encouraged banks to take greater risks, and many banks reduced their lending criteria, eg by granting mortgages to lower-income households and increasing income multiples. These loans were all bundled and re-sold. When there was an increase in the number of defaults on sub-prime debt, banks that had bought re-packaged debt began to be concerned about their exposure to it. Banks became reluctant to lend and the “credit crunch” was born! Section B Solution 4B.54

Answer: B An increase in the reserve balances at the Bank of England will increase the bank’s holdings of liquid assets, so the bank will have to reduce its long-term loans to customers. The liquidity ratio (liquid assets/total assets) will therefore increase. The average maturity of the bank’s loans will decrease, since it will have a smaller proportion of long-term loans (to customers), so the maturity gap (the difference in the average maturity of loans and deposits) will decrease. [1½]

CT7: Q&A Bank Part 4 – Solutions


Solution 4B.55

Securitisation is the process of pooling assets, such as loans or mortgages, into marketable securities, such as bonds. [1] The assets are sold by a bank to a Special Purpose Vehicle (set up by the bank), which funds its purchases by the sale of bonds (known as Collateralised Debt Obligations) to investors (other banks and financial institutions). [1] Securitisation reduces risk for the banks because it means that any illiquid assets that they hold can be sold for cash. This may enable them to operate on a lower liquidity ratio and an increased maturity gap, so increasing profitability. [1] Securitisation also enables banks to grow. By allowing the sale of assets for cash, it provides banks with liquidity and enables them to engage in further lending, so increasing profitability. [1] In addition, by allowing the pooling of assets, securitisation reduces the cashflow risk for investors and therefore encourages financial investment. [1]

However, by causing a lower average liquidity ratio throughout the banking system, securitisation might lead to an excessive expansion of credit. [1] Also, a moral hazard problem occurs, in that banks might be tempted to take greater risks in their lending, eg by making it easier for higher-risk borrowers to borrow, because the risks are being passed on to other financial institutions. [1] Of particular concern is the increased risk of banking collapse because the fortunes of the banks become even more intertwined. Ultimately, many different financial institutions may end up being exposed to the risk of the original bank’s lending policy. [1] [Maximum 6]

CT7: Assignment X2 Questions Page 7


Question X2.22

(i) State the assumption made under the Cournot model of duopoly. [1] The industry demand curve for a duopolistic market is: 100 2= −ind indQ P Firm A has produced an output of 40 units per year for a number of years. (ii) If Firm B’s marginal costs are 10 at all output levels, determine its profit-

maximising price and output. Illustrate your answer with a diagram. [5] [Total 6] Question X2.23

(i) Using the kinked demand-curve model, draw a diagram showing the equilibrium position for a firm operating within an oligopolistic market. Show the average cost curve (AC), the marginal cost curve (MC), the average revenue curve (AR), the marginal revenue curve (MR) and the profit-maximising price (P1) and quantity (Q1). [1]

(ii) Explain why the firm’s average revenue curve has the shape shown on your

diagram. [2] (iii) Describe briefly what is meant by a cartel and state the main reasons why cartels

may be formed. [1] [Total 4] Question X2.24

A bank is considering acquiring a general insurance company. Describe possible motives of the bank for this acquisition. [4] Question X2.25

Explain with the aid of diagrams how a firm practising third-degree price discrimination will determine its price and output levels. [4]

CT7: Assignment X2 Questions


Question X2.26

(i) Cars are generally considered to be a heavily advertised product. Explain why this may be the case. [2]

Product Annual

advertising expenditure ($m)

Annual sales revenue ($m)

Annual number of

units sold (m)

Cars 200 25,000 2

Product X 10 1,250 1,800 (ii) Define the advertising/sales ratio and calculate its value for cars and Product X. [2] (iii) Comment on your numbers in part (ii) and hence on the extent of advertising of

Product X compared to that of cars. [4] [Total 8] Question X2.27

Perfect competition and monopolistic competition are both market forms characterised by a large number of firms. Draw diagrams to illustrate each, and explain the similarities and differences between the two market forms. [10] Question X2.28

(i) List the four stages of a typical product life cycle. [1] (ii) In a multi-product company, discuss the relevance of the product life cycle to: (a) the product range [1] (b) the marketing mix. [8] [Total 10]

CT7: Assignment X2 Solutions Page 15


Profit maximisation In both cases firms are assumed to maximise profits, and thus set q1, their equilibrium level of output, such that MR = MC. [½] Competitive conditions Both perfect competition and monopolistic competition are characterised by (i) a large number of firms and (ii) free entry and exit into the industry. [1] Profit in the long run The assumption of free entry and exit of firms means that firms in both structures will make normal profits in the long run, ie they produce at the level of output where AR = AC. This is the point where the demand curve is a tangent to the AC curve. [1] Shape of the demand curve Perfect competition is distinguished from monopolistic competition by the additional assumptions that consumers have perfect information, and that firms produce a homogeneous product. Under these assumptions, if one firm is trying to sell its output at a higher price than all other firms, it will lose all its customers. [1] The implication of this is that an individual firm can sell as much output as it likes at the market price, but none at all above that price. Thus firms are price takers and face a horizontal demand curve so that MR = P. [1] In monopolistic competition, the output of firms is differentiated in some way. This gives firms some ability to affect the price that they charge. Firms in this type of industry therefore face a downward-sloping demand curve. [1] Average cost As the AR (= D) curve for a firm in perfect competition is horizontal, this means that in the long run firms in perfect competition produce at the lowest point on the AC curve, since this is the point where MC cuts both AC and AR. [1] However, in monopolistic competition, firms produce to the left of the lowest point on the AC curve, as its demand curve is downward-sloping and hence MR < price. [1]

CT7: Assignment X2 Solutions


Social optimum Finally, as P = MC in equilibrium for a perfect competitively firm, it produces at the socially optimal output level, which is not the case under monopolistic competition, where the equilibrium is such that P > MC and the firm therefore produces less than the socially optimal output level. [1] [Maximum 10] Markers: Please reward genuine comparisons, rather than two separate lists! Solution X2.28

(i) The stages of the product life cycle The four stages of a typical product life cycle are:

1. the launch stage

2. the growth stage

3. the maturity stage

4. the decline stage. [1] (ii)(a) Relevance of the product life cycle to the product range Firms should aim to have products in each stage of life in order to survive and grow. For example, profit from the growth and maturity stages of one product can be re-invested in the development and launch of new products. [1] (ii)(b) Relevance of the product life cycle to the marketing mix The firm should adapt the marketing mix, ie the mix of the 4 Ps (product, price, promotion and place), to the stage of life of the product. [1] Launch stage Competition is likely to be low because the firm is likely to have a monopoly in the new product, unless its rivals are simultaneously launching similar products. [½] The firm might adopt an “exclusive” strategy, eg promoting the product in specialist magazines, selling it in high-quality stores and charging a high price, in order to appeal to trend-setters who have a price-inelastic demand. [1]

CT7: Assignment X2 Solutions Page 17


This would be appropriate if there were high barriers to the entry of new firms entering the market and if the product was seen as experimental or too innovative for the mass market. [½] On the other hand, the firm might aim for mass market penetration and maximum brand loyalty (and to deter the entry of new firms) by adopting a mass media promotion campaign, by making sure the product is reliable and available at a wide range of outlets, and by charging low prices. [1] Growth stage Unless there are strong barriers to entry, competition is likely to increase as the rapid growth in sales attracts new entrants into the market. [½] If the original price was set at a high level, the firm will reduce it to compete with the new firms and to attract those customers with a more elastic demand. It is also likely to adapt the product, the promotion message and the sales outlets to appeal to the mass market. [1] It is possible that the market will become oligopolistic and firms may collude to try and maintain prices and profit levels. [½] Maturity stage New firms continue to enter the market at a time when the growth in sales is slowing down, so competition is likely to increase even further. [½] Any collusion may break down and price wars may break out as firms fight for market share. [½] The firm is likely to consider market development strategies, eg expanding production overseas, or appealing to new market segments, by appropriate variations of the marketing mix. They might try to find new uses and applications for the product. [1] The firm might try to rejuvenate the original product, eg “new improved” versions, or introduce new models and designs involving either vertical or horizontal differentiation. [½] Decline stage Initially, the level of competition may be intense as sales fall, and the firm will compete in all areas of the marketing mix, eg price reductions, after-sales service, extended guarantees, added features. [1]

CT7: Assignment X2 Solutions


As long as the product does not become obsolete, sales will reach a plateau, as people will still need replacements. [½] The firm may be unable to survive and will leave the industry, so the remaining industry may then become more oligopolistic again, with a high degree of price collusion. [½] [Maximum 8] [Total 9]

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