The correct answer -
option CUnderstanding 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 doFind the assumption made the manufacturers when they believe that the plan will increase profits
Conclusion: The manufacturer's plan will increase profits
PrethinkingFalsification 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
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