In order to increase profits during a prolonged slowdown in sales, the

In order to increase profits during a prolonged slowdown in sales, the largest manufacturers of automobiles in the United States have instituted record-setting price increases on all their models. The manufacturers believe that this strategy will succeed, even though it is inconsistent with the normal relationship between price and demand.

Type -assumption
Boil it down - In order to increase profits during sales slowdown , manufacturers have instituted record-setting price increase on all models
-- The net increase in profit because of price increase will be more than loss due to decline in sale caused by price increase

A Automobile manufacturers will, of necessity, raise prices whenever they introduce a new model. - Incorrect - price of all models has been increased
B The smaller automobile manufacturers will continue to take away a large percentage of business from the largest manufacturers.- Incorrect
C The increased profit made on cars sold will more than compensate for any decline in sales caused by the price increases. - Correct -- negate this and the argument falls apart
D New safety restraints that will soon become mandatory for all new cars will not be very costly for manufacturers to install. -- Irrelevant
E Low financing and extended warranties will attract many price-conscious consumers. - Irrelevant


Answer C

Plan -> increase the price of all models to increase profits.

Assumption can be -> It will get a good reception from people.

A Automobile manufacturers will, of necessity, raise prices whenever they introduce a new model.
This doesn't address the conclusion.

B The smaller automobile manufacturers will continue to take away a large percentage of business from the largest manufacturers.
smaller automobile is Out of Scope

C The increased profit made on cars sold will more than compensate for any decline in sales caused by the price increases.
Correct answer, Negating this will weaken the argument.
The increased profit made on cars sold will result in further loss, for any decline in sales caused by the price increases.

D New safety restraints that will soon become mandatory for all new cars will not be very costly for manufacturers to install.
Safety restraints, is out of scope

E Low financing and extended warranties will attract many price-conscious consumers.
Out of scope of this argument

Answer C

Defender type Assumption. We are not able to pre-phrase or look for any rogue information.
We need to understand the mentality of the author where his/her way of tackling a prolonged decline in sales will eliminate other negatives.

A. Automobile manufacturers will, of necessity, raise prices whenever they introduce a new model.-Out of Scope

B. The smaller automobile manufacturers will continue to take away a large percentage of business from the largest manufacturers-Out of Scope

C. The increased profit made on cars sold will more than compensate for any decline in sales caused by the price increases-
With the price increase and prolonged decline in sales, profit must be made in the process otherwise there is no use of employing this strategy
HOLD ON

D. New safety restraints that will soon become mandatory for all new cars will not be very costly for manufacturers to install.-Out of Scope

E. Low financing and extended warranties will attract many price-conscious consumers.-Out of Scope

ANSWER: C
LEVEL: 600

The correct answer - option C

Understanding the argument
- Prolonged slowdown in sales
- In order to increase profits, the largest manufacturers of automobiles in the US have increased prices (record setting price increases) on all their models
- These manufacturers believe the plan will succeed
- Even though it is inconsistent with the regular relationship between price and demand (i.e. the prices being set are higher than what are usually the prices for a particular level of demand)

What we need to do
Find the assumption made the manufacturers when they believe that the plan will increase profits

Conclusion: The manufacturer's plan will increase profits

Prethinking
Falsification question: in what scenario will the manufacturer's plan not increase profits?

Falsification Condition:

Revenue = Number of Units * Price
Profit = Revenue - Cost

What if the increase in price drives away customers to such a significant level that the upward impact of price is countered by a reduction in number of automobiles sold? Then, we cannot expect to see an increase in revenue. And assuming no change in costs (we have simply increased price at this point, not touched the cost side), the profits will also not increase.

Assumption: The money made thanks to increased price will be greater than money lost (if any) due to lesser number of automobiles sold. or in other words - the increased money made thanks to increased price can come than compensate for any money lost due to a lesser number of automobiles sold.

Option Choice Analysis

A. Automobile manufacturers will, of necessity, raise prices whenever they introduce a new model.
Irrelevant to the argument. Here, we already know that prices of all models (old and new) has been increased.

B. The smaller automobile manufacturers will continue to take away a large percentage of business from the largest manufacturers.
Again irrelevant. Even if this is not true (negated), it is still possible that the plan will increase profits for the large manufacturers (fails the negation test)

C. The increased profit made on cars sold will more than compensate for any decline in sales caused by the price increases.
Along the lines of the prethinking. Correct answer. The increased profit made on cars sold (because of increased prices) will more than compensate for any reduction in sales (due to reduction in number of units sold). This is a fundamental assumption without which the argument breaks down.

D. New safety restraints that will soon become mandatory for all new cars will not be very costly for manufacturers to install.
Irrelevant. Our argument is about an increase in price plan that is already live. Whether future restraints will be costly or not has no bearing on whether the live plan will be profitable.

E. Low financing and extended warranties will attract many price-conscious consumers.
Completely irrelevant.


Hope this helps!

Regards,
Harsha

Hi Ma'am,
While the reasoning above is absolutely on point. Just wanted to offer a small change,if it improves understanding of the above question.
Negating Option C should be: The increased profit made on cars sold will just compensate or result in loss, for any decline in the sales caused by the price increases.
My small point is: Negating more than compensating should be compensating or less compensating(i.e. loss)

The argument still completely falls apart if considering the above negation. Indeed Option C is the correct option.

Please let me know incase my understanding/reasoning is incorrect.

Thanks and Regards,
Gmat Learner,
Gaurav

This is a high quality question.

Manufacturers belive that the profits will increase, despite the price increase

Profit = Revenue - Cost
Revenue = Price * Quantity

1. Look for how they are planning to reduce costs
or
2. Still keep revenue higher than before (if sales don't go down as much as the increase, then revenue will still be higher)


A. Automobile manufacturers will, of necessity, raise prices whenever they introduce a new model.
Does explain how profits will increase

B. The smaller automobile manufacturers will continue to take away a large percentage of business from the largest manufacturers.
Does explain how profits will increase for largest manufacturers

C. The increased profit made on cars sold will more than compensate for any decline in sales caused by the price increases.
This is aligned with our pre-thinking idea 2

D. New safety restraints that will soon become mandatory for all new cars will not be very costly for manufacturers to install.
Does explain how profits will increase due to price hike. This gets into another future consideration and it's costs, which is irrelevant

E. Low financing and extended warranties will attract many price-conscious consumers.
If customers are price conscious, they will not go for higher priced cars.