In economics, the term speculative bubble refers to a large upward

Question

In economics, the term “speculative bubble”
refers to a large upward move in an asset’s price
driven not by the asset’s fundamentals—that is, by
the earnings derivable from the asset—but rather by
  (5)   mere speculation that someone else will be willing to
pay a higher price for it. The price increase is then
followed by a dramatic decline in price, due to a loss
in confidence that the price will continue to rise, and
the “bubble” is said to have burst. According to
  (10)   Charles Mackay’s classic nineteenth-century account,
the seventeenth-century Dutch tulip market provides
an example of a speculative bubble. But the
economist Peter Garber challenges Mackay’s view,
arguing that there is no evidence that the Dutch tulip
  (15)   market really involved a speculative bubble.

By the seventeenth century, the Netherlands had
become a center of cultivation and development of
new tulip varieties, and a market had developed in
which rare varieties of bulbs sold at high prices. For
  (20)   example, a Semper Augustus bulb sold in 1625 for an
amount of gold worth about U.S.$11,000 in 1999.
Common bulb varieties, on the other hand, sold for
very low prices. According to Mackay, by 1636 rapid
price rises attracted speculators, and prices of many
  (25)   varieties surged upward from November 1636 through
January 1637. Mackay further states that in February
1637 prices suddenly collapsed; bulbs could not be
sold at 10 percent of their peak values. By 1739, the
prices of all the most prized kinds of bulbs had fallen
  (30)   to no more than one two-hundredth of 1 percent of
Semper Augustus’s peak price.

Garber acknowledges that bulb prices increased
dramatically from 1636 to 1637 and eventually
reached very low levels. But he argues that this
  (35)   episode should not be described as a speculative
bubble, for the increase and eventual decline in bulb
prices can be explained in terms of the fundamentals.
Garber argues that a standard pricing pattern occurs
for new varieties of flowers. When a particularly
  (40)   prized variety is developed, its original bulb sells for
a high price. Thus, the dramatic rise in the price of
some original tulip bulbs could have resulted as tulips
in general, and certain varieties in particular, became
fashionable. However, as the prized bulbs become
  (45)   more readily available through reproduction from the
original bulb, their price falls rapidly; after less than
30 years, bulbs sell at reproduction cost. But this
does not mean that the high prices of original bulbs
are irrational, for earnings derivable from the millions
  (50)   of bulbs descendent from the original bulbs can be
very high, even if each individual descendent bulb
commands a very low price. Given that an original
bulb can generate a reasonable return on investment
even if the price of descendent bulbs decreases
  (55)   dramatically, a rapid rise and eventual fall of tulip
bulb prices need not indicate a speculative bubble.    1 
 1. Which one of the following most accurately expresses the main point of the passage?

(A) The seventeenth-century Dutch tulip market is widely but mistakenly believed by economists to provide an example of a speculative bubble.
(B) Mackay did not accurately assess the earnings that could be derived from rare and expensive seventeenth-century Dutch tulip bulbs.
(C) A speculative bubble occurs whenever the price of an asset increases substantially followed by a rapid and dramatic decline.
(D) Garber argues that Mackay’s classic account of the seventeenth-century Dutch tulip market as a speculative bubble is not supported by the evidence.
(E) A tulip bulb can generate a reasonable return on investment even if the price starts very high and decreases dramatically.

2 
 2. Given Garber’s account of the seventeenth-century Dutch tulip market, which one of the following is most analogous to someone who bought a tulip bulb of a certain variety in that market at a very high price, only to sell a bulb of that variety at a much lower price?

(A) someone who, after learning that many others had withdrawn their applications for a particular job, applied for the job in the belief that there would be less competition for it
(B) an art dealer who, after paying a very high price for a new painting, sells it at a very low price because it is now considered to be an inferior work
(C) someone who, after buying a box of rare motorcycle parts at a very high price, is forced to sell them at a much lower price because of the sudden availability of cheap substitute parts
(D) a publisher who pays an extremely high price for a new novel only to sell copies at a price affordable to nearly everyone
(E) an airline that, after selling most of the tickets for seats on a plane at a very high price, must sell the remaining tickets at a very low price

3 
 3. The passage most strongly supports the inference that Garber would agree with which one of the following statements?

(A) If speculative bubbles occur at all, they occur very rarely.
(B) Many of the owners of high-priced original tulip bulbs could have expected to at least recoup their original investments from sales of the many bulbs propagated from the original bulbs.
(C) If there is not a speculative bubble in a market, then the level of prices in that market is not irrational.
(D) Most people who invested in Dutch tulip bulbs in the seventeenth century were generally rational in all their investments.
(E) Mackay mistakenly infers from the fact that tulip prices dropped rapidly that the very low prices that the bulbs eventually sold for were irrational.

4 
 4. The passage states that Mackay claimed which one of the following?

(A) The rapid rise in price of Dutch tulip bulbs was not due to the fashionability of the flowers they produced.
(B) The prices of certain varieties of Dutch tulip bulbs during the seventeenth century were, at least for a time, determined by speculation.
(C) The Netherlands was the only center of cultivation and development of new tulip varieties in the seventeenth century.
(D) The very high prices of bulbs in the seventeenth-century Dutch tulip market were not irrational.
(E) Buyers of rare and very expensive Dutch tulip bulbs were ultimately able to derive earnings from bulbs descendent from the original bulbs.

5 
 5. The main purpose of the second paragraph is to

(A) present the facts that are accepted by all experts in the field
(B) identify the mistake that one scholar alleges another scholar made
(C) explain the basis on which one scholar makes an inference with which another scholar disagrees
(D) undermine the case that one scholar makes for the claim with which another scholar disagrees
(E) outline the factual errors that led one scholar to draw the inference that he drew

6 
 6. The phrase “standard pricing pattern” as used in line 38 most nearly means a pricing pattern

(A) against which other pricing patterns are to be measured
(B) that conforms to a commonly agreed-upon criterion
(C) that is merely acceptable
(D) that regularly recurs in certain types of cases
(E) that serves as an exemplar

Shadyshades · Accepted Answer

1. Which one of the following most accurately expresses the main point of the passage?

Please refer to Para1 last line- That's the most important line of the RC. 
 "But the economist Peter Garber challenges Mackay’s view, arguing that there is no evidence that the Dutch tulip market really involved a speculative bubble" .

The author never mentioned his views. We are looking for an option in which both Garber and Mackay came into conflict .

(D) Garber argues that Mackay’s classic account of the seventeenth-century Dutch tulip market as a speculative bubble is not supported by the evidence.
Perfect, that's what the passage is all about.

2. Given Garber’s account of the seventeenth-century Dutch tulip market, which one of the following is most analogous to someone who bought a tulip bulb of a certain variety in that market at a very high price, only to sell a bulb of that variety at a much lower price?

Please refer to Para3, lines 39-50

When a particularly prized variety is developed, its original bulb sells for a high price...However, as the prized bulbs become more readily available...But this does not mean that the high prices of original bulbs are irrational. 
 
 We are looking for an option that says "Buy high, sell low".

(A) someone who, after learning that many others had withdrawn their applications for a particular job, applied for the job in the belief that there would be less competition for it
 Nowhere in the option talks about prices. Eliminate A.

(B) an art dealer who, after paying a very high price for a new painting, sells it at a very low price because it is now considered to be an inferior work
They sell at a low price not because the new variety bulbs are of an inferior work but because the prized bulbs are easily available. Eliminate B.

(C) someone who, after buying a box of rare motorcycle parts at a very high price, is forced to sell them at a much lower price because of the sudden availability of cheap substitute parts
In this option, I think the problem starts after " because of the sudden availability of cheap substitute parts". It's the prized bulbs that become more readily available and not the parts of the original bulbs. Eliminate C.

(D) a publisher who pays an extremely high price for a new novel only to sell copies at a price affordable to nearly everyone
Perfect, HOLD ON.

(E) an airline that, after selling most of the tickets for seats on a plane at a very high price, must sell the remaining tickets at a very low price.
We are looking for a BUY and SELL option and not SELL and SELL option.

3. The passage most strongly supports the inference that Garber would agree with which one of the following statements?

Please refer lines 46-55.

But this does not mean that the high prices of original bulbs are irrational (not logical)...Given that an original bulb can generate a reasonable return on investment even if the price of descendent bulbs decreases.

(B) Many of the owners of high-priced original tulip bulbs could have expected to at least recoup their original investments from sales of the many bulbs propagated from the original bulbs.
Correct.

4. The passage states that Mackay claimed which one of the following?

Please refer lines 9-12

According to Charles Mackay’s classic nineteenth-century account, the seventeenth-century Dutch tulip market provides an example of a speculative bubble

In the second para, the author states the reasoning given by Mackay to support his theory.

(B) The prices of certain varieties of Dutch tulip bulbs during the seventeenth century were, at least for a time, determined by speculation.
Correct.

5. The main purpose of the second paragraph is to
 
 The second para describes the reasoning given by Mackay. In short, it supports Mackay theory. We are looking for a positive tone option from Mackay's point of view.

(C) explain the basis on which one scholar makes an inference with which another scholar disagrees

6. The phrase “standard pricing pattern” as used in line 38 most nearly means a pricing pattern

Please refer to lines 38 onwards- 
 Garber argues that a standard pricing pattern occurs for new varieties of flowers...

Now the author explains how the standard pricing pattern occurs in tulip bulb case.

When a particularly prized variety is developed, its original bulb sells for a high price...However, as the prized bulbs become more readily available...But this does not mean that the high prices of original bulbs are irrational.

The author is trying to say that it's a regular pattern to a certain variety to which standard pricing happens.

(D) that regularly recurs in certain types of cases
Correct

Sajjad1994 · Answer

Explanation

2. Given Garber’s account of the seventeenth-century Dutch tulip market, which one of the following is most analogous to someone who bought a tulip bulb of a certain variety in that market at a very high price, only to sell a bulb of that variety at a much lower price?

Explanation

This long, involved question stem is pretty straightforward if we take it piece by piece. We are asked to find an answer that treats another commodity the way Garber treated the tulip bulbs. It’s a good thing we paraphrased Garber’s reasoning in the final paragraph. Garber said the new bulbs were priced so high because the buyer will make so much money from the bulbs’ descendants (although the reproduced bulbs themselves will be cheap). So, we just need to evaluate the answers and choose the one that has an original purchased for a high price so that its descendants can be sold more cheaply. That leads us to  (D) , where the publisher pays a high price for the original so that he can sell lots of cheap copies. We can see this strong analogy provided that we’ve predicted the answer we are looking for before evaluating the answer choices.

(A)  This misses the analogy by making no reference to anything that could be considered original or descendant. Nothing in Garber’s tulip bulb analysis implies a withdrawal and reapplication.

(B)  Here we have the very same original being resold, not its descendants or copies.

(C)  As in  (B) , what is resold is the original high-priced item, rather than descendants or copies made from that item. The “substitute parts” in this answer choice presumably came from some other source.

(E)  In this answer, the problem for the seller is excess space. There is nothing here about buying an original with the intention of selling copies made from it.

Answer: D

Sajjad1994 · Answer

Explanation

3. The passage most strongly supports the inference that Garber would agree with which one of the following statements?

Explanation

In this Inference question, the correct answer will be something that must follow from Garber’s point of view. Fortunately, as strategic readers, we’ve already paraphrased his long argument from  Paragraph 3.  Garber does not believe that the tulip prices indicated a speculative bubble. He thinks, rather, that the buyers rationally calculated the fundamentals, concluding that they could make money by selling lots of the original bulbs’ descendants. This is exactly what answer  (B)  says in slightly different words. Paraphrasing is a crucial skill for the strategic reader.

(A)  We don’t learn about Garber’s opinion of speculative bubbles in general in the passage, only his take on the 17th-century tulip market.

(C)  This answer gets the sufficiency–necessity relationship backwards. Garber would argue that if the prices are rationally based on fundamentals, then there is not a speculative bubble in the market.

(D)  This answer goes well beyond the Scope of the passage, which tells us nothing about what Garber thought of the 17th-century investors’ nontulip plays.

(E)  This answer distorts Mackay’s account. Mackay claimed that the original high prices were irrational, and that the later low prices showed this. This is what Garber thought was mistaken, not what was stated in choice (E)

Answer: B

Sajjad1994 · Answer

Explanation

6. The phrase “standard pricing pattern” as used in line 38 most nearly means a pricing pattern

Explanation

When the LSAT takes a  “vocabulary-in-context”  approach in an Inference question, they will invariably pick a word or phrase the meaning of which is dependent on how the author is using it in this particular passage. The test will usually give you a clear referent reading clue (as they do here—line 38), so finding the phrase will be a snap. Where students who miss these questions go wrong is by comparing the answer choices with the phrase in the question stem without researching the context in which the phrase was used in this passage, by this author. When we check the phrase  “standard pricing pattern”  in line 38, we see that the author is explaining Garber’s criticism of Mackay, in which Garber says that the investors were rationally paying high prices for the original bulbs thinking they could make their money back selling cheap descendants. That’s  “standard”  stuff for new flower varieties, Garber says; it happens that way over and over. We need an answer that would preserve Garber’s meaning, and that’s  (D) , which nails the recurring nature of this pattern.

(A)  There’s no sense from the context that Garber would think that any other commodities’ patterns would be measured against this one that recurs for new flower varieties. He might, but we cannot determine that from what we read in lines following this phrase in the passage.

(B)  This answer is tricky. It may be that investors act this way whenever a new flower variety comes out, but there is no sense in the passage that the pattern is dependent on a meeting of the minds for its validity.

(C)  The notion that the term is used to mean that the pricing pattern reaches some minimal level distorts its use in the passage beyond recognition.

(E)  Nothing in the paragraph indicates that either Garber or the author thinks the new flower pricing pattern stands as an example or illustration of anything.

Answer: D

In economics, the term speculative bubble refers to a large upward

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GMAT Reading Comprehension (RC) Questions

In economics, the term speculative bubble refers to a large upward

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