1.2.2 Entrepreneurial Motives — Practice Questions

Six original multiple-choice questions on why people start businesses: profit as an incentive, and the non-financial motives of ethics, social aims, independence and home working.

6 questions Edexcel B A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 1.2.2 Entrepreneurial Motives revision notes.

1. 1. A nurse earning £32,000 a year leaves the job to run a dog-walking business. In its first year the business has revenue of £58,000 and costs of £34,000, not counting any pay for the owner. In money terms, compared with staying in the job, the owner's first year in business leaves them

   Calculation

   Select one answer

   A £8,000 worse off.

   B £8,000 better off.

   C £24,000 better off.

   D £26,000 better off.
   Show model answer

   Answer: A (£8,000 worse off.). Profit is total revenue minus total costs: £58,000 − £34,000 = £24,000.
   The opportunity cost of running the business is the £32,000 salary given up.
   £24,000 − £32,000 = −£8,000, so the owner is £8,000 a year worse off in money terms.
   Profit only works as an incentive if it beats what the entrepreneur gives up. If the owner stays in business anyway, something other than money is keeping them there.

   Why the other options are wrong

   • B — The arithmetic is right but the sign is wrong. The profit, £24,000, is less than the £32,000 salary given up, so the owner is worse off.
   • C — This is the profit, £58,000 − £34,000. It ignores the opportunity cost: the owner could have earned £32,000 by staying in the job.
   • D — This takes the salary from revenue, £58,000 − £32,000, and forgets the £34,000 of business costs.

2. 2. The first indoor climbing centre in a large town reports high profits. Within two years three more climbing centres, run by different owners, open nearby. The role of profit this best illustrates is that it

   Applied reasoning

   Select one answer

   A Covers the opportunity cost of the owner's time.

   B Pays for growth without the need to borrow.

   C Rewards the owner for the risk taken.

   D Signals where new firms can make money.
   Show model answer

   Answer: D (Signals where new firms can make money.). High profits in a market tell other entrepreneurs there is money to be made, so new firms enter. The new centres are run by different owners, so it is the first centre's profit acting as a signal, drawing resources to where consumers want them. This is the price mechanism at work.

   Why the other options are wrong

   • A — Profit does need to beat the owner's opportunity cost, but that explains why the first owner stays in business, not why new firms arrive.
   • B — Retained profit can fund growth, but that would be the first centre opening a second site. The new centres have different owners.
   • C — Profit is the reward for enterprise, but a reward to the first owner does not explain why others enter. It is the signal those profits send that brings them in.

3. 3. Table 1 describes four small businesses.
   Using Table 1, the business that is best described as a social enterprise is

   Data interpretation

   Table 1: Four small businesses

   	What it does	What happens to its profit
   Business 1	Sells clothing made only from organic, fairly traded cotton	Paid to its two owners
   Business 2	A graphic designer who left an agency to work for themselves	Kept by the designer
   Business 3	Sells handmade jewellery online from the owner's spare room	Kept by the owner
   Business 4	A café that trains young people leaving care to work as baristas	Mostly spent on its training programme

   Select one answer

   A Business 1.

   B Business 2.

   C Business 3.

   D Business 4.
   Show model answer

   Answer: D (Business 4.). A social enterprise trades to tackle a social or environmental problem and reinvests most of its profit in that aim. Business 4 sells meals like any café, but it exists to train young people leaving care and puts its surplus back into the programme. It still needs revenue above its costs: the surplus is what pays for the mission.

   Why the other options are wrong

   • A — This is an ethical stance: the business follows moral principles in what it buys. But its profit goes to the owners, so it is not a social enterprise.
   • B — This owner's motive is independence: being their own boss. Nothing about the business tackles a social problem.
   • C — This is home working: the owner runs it from a spare room, so there is no shop to rent. The profit is the owner's own.

4. 4. A sole trader makes handmade soap at home and sells it online. Demand grows strongly after the soap is featured in a magazine. The constraint most likely to hold the business back is

   Applied reasoning

   Select one answer

   A A lack of space for stock, equipment and staff.

   B Customers' reluctance to buy from a website.

   C High rent on its premises, which cuts into profit.

   D The owner's lack of any profit motive.
   Show model answer

   Answer: A (A lack of space for stock, equipment and staff.). Home working cuts costs: there is no shop or office to rent and no commute. Its limits are space and the difficulty of taking on staff. A sudden rise in orders needs more room for stock and equipment, and more people to make and pack the soap, which a home cannot easily provide. That is why home-based businesses often stay small.

   Why the other options are wrong

   • B — Selling online is what makes home working easier, and demand is already growing strongly. Customers are clearly willing to buy from the website.
   • C — The business is run from home, so it pays no rent on premises. Avoiding rent is one of the main advantages of home working.
   • D — Nothing suggests the owner does not care about profit. A non-financial motive, such as working from home, can sit alongside a profit motive, and the business still has to cover its costs.

5. 5. An ethical clothing brand switches its T-shirts to organic cotton. The fabric in each T-shirt now costs £9 instead of £6. The brand raises its price from £20 to £25, and weekly sales fall from 400 to 360. All its other costs are fixed and unchanged. The change in the brand's weekly profit is

   Calculation

   Select one answer

   A −£1,200

   B +£160

   C +£800

   D +£1,000
   Show model answer

   Answer: B (+£160). Change in revenue: 360 × £25 − 400 × £20 = £9,000 − £8,000 = +£1,000.
   Change in fabric costs: 360 × £9 − 400 × £6 = £3,240 − £2,400 = +£840.
   Change in profit: £1,000 − £840 = +£160.
   An ethical stance often raises costs, but some customers will pay a premium for it. Here enough of them do that profit rises slightly, so the ethics have become a selling point.

   Why the other options are wrong

   • A — This counts only the extra fabric cost on the original 400 shirts, 400 × £3, and ignores the higher price. An ethical stance does not have to cut profit if customers will pay more.
   • C — This uses the £5 price rise minus the £3 cost rise on all 400 shirts, 400 × £2, and forgets that sales fell to 360.
   • D — This is the change in revenue only. The fabric bill rose too, by £840.

6. 6. A chef who has worked in hotel kitchens for fifteen years opens a small restaurant, saying: "I want to decide the menu myself and answer to no one." The motive the chef is describing is

   Definition in context

   Select one answer

   A Ethical stance.

   B Home working.

   C Independence.

   D Social entrepreneurship.
   Show model answer

   Answer: C (Independence.). Wanting to be your own boss, with no manager above you, is the motive of independence. The price of it is that every decision, and every loss, is the chef's own.

   Why the other options are wrong

   • A — An ethical stance means running the business by moral principles, such as how it sources its food. The chef says nothing about principles.
   • B — A restaurant cannot be run from home, and the chef's reason is about control, not where the work is done.
   • D — A social enterprise trades to tackle a social or environmental problem. The chef's aim is personal control, not a social mission.