800orDie wrote:
For large farms to be as productive as they can be, their owners need to invest heavily in expensive machinery. This typically requires them to go into considerable debt, and interest on this debt is then a significant fixed cost. This high fixed cost makes those farmers vulnerable to operating losses if the prices of their products drop.
The information above best supports which of the following inferences about large farms?
(A) They can be highly productive without being profitable.
(B) They tend to be so highly productive that they drive down market prices.
(C) They tend to be consistently profitable if their owners borrow at low interest rates.
(D) They respond to operating losses by increasing their productivity.
(E) They cannot be profitable if their owners depend on credit.
panshul22For large farms to be very productive, expensive machinery is needed.
This requires large debt and interest on this is a big cost.
So operating losses can result if prices of products drop (revenue decreases).
So even though productivity would be high, there could be operating losses if prices drop. We are looking for an inference - something that must be true as per the argument.
(A) They can be highly productive without being profitable.
Correct. We know there can be losses if prices drop even though the farm may be very productive.
(B) They tend to be so highly productive that they drive down market prices.
We don't know what may drive the prices down.
(C) They tend to be consistently profitable if their owners borrow at low interest rates.
No. We don't know how low/high interest rates impact. We just know that interest leads to high fixed cost.
(D) They respond to operating losses by increasing their productivity.
We are discussing what happens when they increase productivity - they could see losses if prices drop. What they do once they see losses, we don't know.
(E) They cannot be profitable if their owners depend on credit.
Not true. They could be profitable if prices of their produce is high. The argument only says that if the prices drop, they could see losses.
Answer (A)