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avohden
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E
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In an attempt to abate the pernicious decline in MicroChip's revenue brought about by shrinking demand that is accompanying an economic recession, MicroChip is offering customers a 50% discount for the next three months on all purchases fully paid for within 15 days.Which of the following assumptions most underlies the chip maker's offer of a discount?
A) MicroChip expects this discount to help the company retain existing customers and gain new ones, enabling the firm to survive in the long-term.
B) There are no other competing chip companies with prices lower than the reduced price.
C) The government will provide massive technology tax credits to businesses, spurring them to purchase chips and other related products.
D) The government will not pursue MircoChip if in fact its behavior in offering a deep discount amounts to a violation of predatory pricing laws.
E) The decrease in revenue brought about by the reduction in price will be smaller than the anticipated increase in revenue brought about by the increase in demand (spurred by the reduction in price).
Source: platinumgmat.com | oe to follow
06 Nov 2013, 20:36
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Good one!
Hint: Stay focused on the revenue (not the same as profit).
Hint: Stay focused on the revenue (not the same as profit).
avohden
Joined: 09 Jul 2013
Last visit: 14 Mar 2015
Posts: 403
Given Kudos: 630
Status:1,750 Q's attempted and counting
Affiliations: University of Florida
Location: United States (FL)
Schools: Warrington (A)
GMAT 1: 570 Q42 V28
GMAT 2: 610 Q44 V30
GMAT 3: 600 Q45 V29
GMAT 4: 590 Q35 V35
GPA: 3.45
WE:Accounting (Accounting)
15 Nov 2013, 10:47
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Official Explanation
Answer E - In answering this question, we must keep separate revenue and profit. Further, we must separate revenue from all other aspects of the business. It is important to keep in mind that MicroChip's efforts are aimed at increasing revenue so any assumption that does not pertain to revenue is almost certainly unnecessary.
A. This answer addresses "enabling the firm to survive in the long-term." However, the original argument deals with "an attempt to abate the pernicious decline in MicroChip's revenue." In other words, this answer deals with the ability of the firm to survive in the long-term and retain customers instead of addressing how the company will increase its revenue (which is different from the number of customers or the level of profitability). It is not necessary to make an assumption about long-term survival in order to make a conclusion about increasing revenue.
B. Even if there were other companies with lower prices, as long as the other companies do not further lower their prices, it will not affect MicroChip's ability to increase its demand and revenue. Further, the original argument only deals with MicroChip's attempt to increase its revenue. In other words, the original argument deals with MicroChip's ability to raise its revenue on absolute terms—not its ability to raise revenue more than rivals. It is not necessary to make an assumption about other firms' prices in order to make a conclusion about increasing MicroChip's revenue.
C. Although this would improve MicroChip's revenue, it is not a necessary assumption underlying MicroChip's strategy of offering a discount as the company did not need to offer a discount to increase revenue if it assumed the government would stimulate demand on its own. In other words, if MicroChip assumed the government would stimulate demand, MicroChip would not have offered a discount for the discount would not have been necessary.
D. This answer does not address an assumption that underlies increasing revenue, but rather legality. Further, the answer does not state that MicroChip's actions violate a law. Finally, even if the government pursued charges, this would not necessarily decrease revenue (although it would certainly decrease profit as MicroChip would incur legal fees etc.).
E. This answer contains the assumption that directly relates to MicroChip's attempt to increase its revenue. In order for the decrease in price to increase total revenue, the volume of sales must increase as total revenue equals price multiplied by volume.
Answer E - In answering this question, we must keep separate revenue and profit. Further, we must separate revenue from all other aspects of the business. It is important to keep in mind that MicroChip's efforts are aimed at increasing revenue so any assumption that does not pertain to revenue is almost certainly unnecessary.
A. This answer addresses "enabling the firm to survive in the long-term." However, the original argument deals with "an attempt to abate the pernicious decline in MicroChip's revenue." In other words, this answer deals with the ability of the firm to survive in the long-term and retain customers instead of addressing how the company will increase its revenue (which is different from the number of customers or the level of profitability). It is not necessary to make an assumption about long-term survival in order to make a conclusion about increasing revenue.
B. Even if there were other companies with lower prices, as long as the other companies do not further lower their prices, it will not affect MicroChip's ability to increase its demand and revenue. Further, the original argument only deals with MicroChip's attempt to increase its revenue. In other words, the original argument deals with MicroChip's ability to raise its revenue on absolute terms—not its ability to raise revenue more than rivals. It is not necessary to make an assumption about other firms' prices in order to make a conclusion about increasing MicroChip's revenue.
C. Although this would improve MicroChip's revenue, it is not a necessary assumption underlying MicroChip's strategy of offering a discount as the company did not need to offer a discount to increase revenue if it assumed the government would stimulate demand on its own. In other words, if MicroChip assumed the government would stimulate demand, MicroChip would not have offered a discount for the discount would not have been necessary.
D. This answer does not address an assumption that underlies increasing revenue, but rather legality. Further, the answer does not state that MicroChip's actions violate a law. Finally, even if the government pursued charges, this would not necessarily decrease revenue (although it would certainly decrease profit as MicroChip would incur legal fees etc.).
E. This answer contains the assumption that directly relates to MicroChip's attempt to increase its revenue. In order for the decrease in price to increase total revenue, the volume of sales must increase as total revenue equals price multiplied by volume.
