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In the past year,there has been a large drop in the number [#permalink]
 23 May 2005, 10:52
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In the past year,there has been a large drop in the number of new cars sold due to harsh economic conditions in the marketplace and high taxes.At the same time ,the average price paid for a new car has risen dramatically.
Which of the following if true explains the increase in the average price of a new car?
a)the price of used cars has climbed steadily over the past ten years
b)there will be a rax reduction later in the year which is expected to aid moderate and low income families
c)the market for expensive cars has been unaffected by the current economic conditions
d)economic conditions are expected to get significantly worse before the end of the year
e)low demand for trucks and vans has led to lower production in the factories
Please give explanations for your choice.
Best.
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Director
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I will pick C.
total # of cars drop, but High-end market stay unchanged. then of course average price goes up.
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C)...weighted average explains this discrepancy.
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C
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A. Price of used cars goes up, consumers would by fewer used cars, that makes them switch to buying new cars, driving the price of new cars up. Decrease in supply of new cars only reinforces new car price increase.
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sparky wrote: A. Price of used cars goes up, consumers would by fewer used cars, that makes them switch to buying new cars, driving the price of new cars up. Decrease in supply of new cars only reinforces new car price increase.
...but the argument states that there has been a drop in the number of new cars sold.
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christoph wrote: sparky wrote: A. Price of used cars goes up, consumers would by fewer used cars, that makes them switch to buying new cars, driving the price of new cars up. Decrease in supply of new cars only reinforces new car price increase. ...but the argument states that there has been a drop in the number of new cars sold. 'drop in the number of new cars sold' = a decrease in supply of new cars leading to increase in price of new cars, increase in demand for new cars reinforces this price increase.
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C.
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sparky wrote: christoph wrote: sparky wrote: A. Price of used cars goes up, consumers would by fewer used cars, that makes them switch to buying new cars, driving the price of new cars up. Decrease in supply of new cars only reinforces new car price increase. ...but the argument states that there has been a drop in the number of new cars sold. 'drop in the number of new cars sold' = a decrease in supply of new cars leading to increase in price of new cars, increase in demand for new cars reinforces this price increase. no  drop in the number of new cars sold = an increase in supply of new cars = drop in prices of new cars BUT the prices increase. so thats the discrepancy we have to solve.
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christoph wrote: sparky wrote: christoph wrote: sparky wrote: A. Price of used cars goes up, consumers would by fewer used cars, that makes them switch to buying new cars, driving the price of new cars up. Decrease in supply of new cars only reinforces new car price increase. ...but the argument states that there has been a drop in the number of new cars sold. 'drop in the number of new cars sold' = a decrease in supply of new cars leading to increase in price of new cars, increase in demand for new cars reinforces this price increase. no drop in the number of new cars sold = an increase in supply of new cars = drop in prices of new cars BUT the prices increase. so thats the discrepancy we have to solve. Why 'drop in the number of new cars sold = an increase in supply of new cars' ?
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Doloris, what's OA?
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sparky wrote:
Why 'drop in the number of new cars sold = an increase in supply of new cars' ?
a car business produces 1000 cars each year. it sells 500 cars in 2004. so 500 cars are left. in 2005 it sells only 100 cars. so 500 (rest of 2004) + 900 = 1400 are left. in 2006 it sells no cars. so 500 (2004) + 900 (2005) + 1000 (2006) = 2400 are left. the supply increases each each year, because the company sells fewer cars each year. so to make the cars more attractive, the company lowers the price so that the capital lockup is not so high. BUT in our case the price increases and that is unusual. C) resolves it.
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christoph wrote: sparky wrote:
Why 'drop in the number of new cars sold = an increase in supply of new cars' ?
a car business produces 1000 cars each year. it sells 500 cars in 2004. so 500 cars are left. in 2005 it sells only 100 cars. so 500 (rest of 2004) + 900 = 1400 are left. in 2006 it sells no cars. so 500 (2004) + 900 (2005) + 1000 (2006) = 2400 are left. the supply increases each each year, because the company sells fewer cars each year. so to make the cars more attractive, the company lowers the price so that the capital lockup is not so high. BUT in our case the price increases and that is unusual. C) resolves it. But why they would keep producing cars at the same rate, if nobody is buying them?
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sparky wrote: But why they would keep producing cars at the same rate, if nobody is buying them? hm, i think we drift away. your explanation for A) is sparky wrote: A. Price of used cars goes up, consumers would by fewer used cars, that makes them switch to buying new cars, driving the price of new cars up. Decrease in supply of new cars only reinforces new car price increase.
in your reasoning, you say that ppl switch from old cars to new cars. this would mean that the price as well as the number of new cars sold would go up. BUT the argument states that the number of new cars goes down while the price goes up. the author also doesnt say that the supply decreases. he says that fewer ppl buy new cars. that is different.
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C
a)the price of used cars has climbed steadily over the past ten years
"used" cars... the passage does not comment on the effect of used cars' prices on new cars
b)there will be a rax reduction later in the year which is expected to aid moderate and low income families
but where does the passage say they will therefore buy new cars.
d)economic conditions are expected to get significantly worse before the end of the year
contradicts
e)low demand for trucks and vans has led to lower production in the factories
?
that leaves us with C, and it does make sense, since if the prices of the non-expensive range of cars has gone down, but that of expensive cars has gone up, and the delta price increase of the expensive cars is more than the delta price decrease of the non-expensive ones, the average price will go up... This choice is based on other things remaining same - such as volume etc.
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christoph wrote: sparky wrote: But why they would keep producing cars at the same rate, if nobody is buying them? hm, i think we drift away. your explanation for A) is sparky wrote: A. Price of used cars goes up, consumers would by fewer used cars, that makes them switch to buying new cars, driving the price of new cars up. Decrease in supply of new cars only reinforces new car price increase. in your reasoning, you say that ppl switch from old cars to new cars. this would mean that the price as well as the number of new cars sold would go up. BUT the argument states that the number of new cars goes down while the price goes up. the author also doesnt say that the supply decreases. he says that fewer ppl buy new cars. that is different. First of all, I never said anything about sales quantities of new cars  . The question asks us to explain 'increase in price of new cars' not their quantity.
Second of all, increase in demand (switching) doesn't necessarilly mean an increase in actual sales if supply changes. To make a full judgement about sales and price we need info on supply as well which we don't have (except in E but it only refers to vans and trucks).
All other things being equal (including supply), increase in demand would lead to a price increase - that's what we want to know. We do not need to explain why new car sales decreased. Although sales decrease is consistent with supply decrease, that's why I mentioned it my answer.
Hey, for all that matters E can be the best answer too since it talks about the supply side.
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E..
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sparky wrote: First of all, I never said anything about sales quantities of new cars . The question asks us to explain 'increase in price of new cars' not their quantity. Second of all, increase in demand (switching) doesn't necessarilly mean an increase in actual sales if supply changes. To make a full judgement about sales and price we need info on supply as well which we don't have (except in E but it only refers to vans and trucks). All other things being equal (including supply), increase in demand would lead to a price increase - that's what we want to know. We do not need to explain why new car sales decreased. Although sales decrease is consistent with supply decrease, that's why I mentioned it my answer. Hey, for all that matters E can be the best answer too since it talks about the supply side. ok  the question asks why the number of new cars sold decreases AND at the same time the average price of new cars increases. A) states that the price of used cars climbed steadily. this may/maybe not affect indirectly the average price of new cars. in CR we shouldnt infer too much. so IMO A) demands too much inference. C) says that the number of expensive cars sold is constant while at the same time the number of new cars decreases. this would explain that the average price increased dramatically. IMO this does not demand much inference. we can even show it with the weighted average. it sticks very closely to the facts that are given in the argument. maybe OA is posted soon... 
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sparky wrote: First of all, I never said anything about sales quantities of new cars . The question asks us to explain 'increase in price of new cars' not their quantity. Second of all, increase in demand (switching) doesn't necessarilly mean an increase in actual sales if supply changes. To make a full judgement about sales and price we need info on supply as well which we don't have (except in E but it only refers to vans and trucks). All other things being equal (including supply), increase in demand would lead to a price increase - that's what we want to know. We do not need to explain why new car sales decreased. Although sales decrease is consistent with supply decrease, that's why I mentioned it my answer. Hey, for all that matters E can be the best answer too since it talks about the supply side. ok the question asks why the number of new cars sold decreases AND at the same time the average price of new cars increases. A) states that the price of used cars climbed steadily. this may/maybe not affect indirectly the average price of new cars. in CR we shouldnt infer too much. so IMO A) demands too much inference. C) says that the number of expensive cars sold is constant while at the same time the number of new cars decreases. this would explain that the average price increased dramatically. IMO this does not demand much inference. we can even show it with the weighted average. it sticks very closely to the facts that are given in the argument. maybe OA is posted soon...
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Actually, now that I actuallly thought about it, E does sound better than A.
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