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# pt question

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Manager
Joined: 30 Mar 2007
Posts: 177

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05 May 2007, 07:10
In the year following an eight cent increase in the federal tax on a pack of cigarettes, sales of cigarettes fell ten percent. In contrast, in the year prior to the tax increase, sales had fallen one percent. The volume of cigarette sales is therefore strongly related to the after-tax price of a pack of cigarettes.
The argument above requires which of the following assumptions?

A. During the year following the tax increase, the pretax price of a pack of cigarettes did not increase by as much as it had during the year prior to the tax increase.
B. The one percent fall in cigarette sales in the year prior to tax increase was due to a smaller tax increase.
C. The pretax price of a pack of cigarettes gradually decreased throughout the year before and the year after the tax increase.
D. For the year following the tax increase, the pretax price of a pack of cigarettes was not eight or more cents lower than it had been the previous year.
E. As the after-tax price of a pack of cigarettes rises, the pretax price also rises.

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Senior Manager
Joined: 27 Mar 2007
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05 May 2007, 07:40
Year X 8% increase in tax , sales fell 10%.
Year before X sales had fallen 1%.

Conclusion: The volume of cigarette sales is strongly related to the after-tax price of a pack of cigarettes.

A. Out of scope, we don't know.
B. The 1% fall in sales in the year before X was due to a smaller tax increase. Seems logic, best answer!
C. Out of scope, we don't know.
D. Out of scope, we don't know.
E. There is a correlation between tax and sales and not between tax and tax, therefore wrong!

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Director
Affiliations: FRM Charter holder
Joined: 02 Dec 2006
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Schools: Stanford, Chicago Booth, Babson College

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05 May 2007, 07:47
catgmat wrote:
Year X 8% increase in tax , sales fell 10%.
Year before X sales had fallen 1%.

Conclusion: The volume of cigarette sales is strongly related to the after-tax price of a pack of cigarettes.

A. Out of scope, we don't know.
B. The 1% fall in sales in the year before X was due to a smaller tax increase. Seems logic, best answer!
C. Out of scope, we don't know.
D. Out of scope, we don't know.
E. There is a correlation between tax and sales and not between tax and tax, therefore wrong!

I think the answer is D.

If the pre-tax price is less than 8 cents, then effect of taxation would not be felt. In that case, the author cannot say that tax had an effect. For his statement to be valid, the tax should result in higher after tax price.

B cannot be the assumption. He is concluding based on 10% fall with tax, with 1% fall previous year. We cannot not be sure about author's assumption here.

The whole logic here is to make the product expensive, to discourage the consumption.

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Senior Manager
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05 May 2007, 08:09
aurobindo wrote:

I think the answer is D.

If the pre-tax price is less than 8 cents, then effect of taxation would not be felt. In that case, the author cannot say that tax had an effect. For his statement to be valid, the tax should result in higher after tax price.

B cannot be the assumption. He is concluding based on 10% fall with tax, with 1% fall previous year. We cannot not be sure about author's assumption here.

The whole logic here is to make the product expensive, to discourage the consumption.

I agree, but (D) is about the year following the tax increase, i.e. the year after the tax has been increased 8%. Mustn't it be the year before the tax increase to be valid? I don't know, (B) seems to be the most logical assumption. Any further suggestions? Cheers

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Director
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Posts: 726

Kudos [?]: 103 [0], given: 4

Schools: Stanford, Chicago Booth, Babson College

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05 May 2007, 08:13
catgmat wrote:
aurobindo wrote:

I think the answer is D.

If the pre-tax price is less than 8 cents, then effect of taxation would not be felt. In that case, the author cannot say that tax had an effect. For his statement to be valid, the tax should result in higher after tax price.

B cannot be the assumption. He is concluding based on 10% fall with tax, with 1% fall previous year. We cannot not be sure about author's assumption here.

The whole logic here is to make the product expensive, to discourage the consumption.

I agree, but (D) is about the year following the tax increase, i.e. the year after the tax has been increased 8%. Mustn't it be the year before the tax increase to be valid? I don't know, (B) seems to be the most logical assumption. Any further suggestions? Cheers

The impact can be seen after the increase only. I mean the next year. No?

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Senior Manager
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05 May 2007, 08:20
aurobindo wrote:

The impact can be seen after the increase only. I mean the next year. No?

Okay, I see. Assuming that the tax would be less than 8%, the sale would increase again. I understand your reasoning and you are probably right. (D) is good, but I would choose (B) on test day. Thanks for the discussion and Cheers!

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Manager
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14 May 2007, 11:38
one more B

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14 May 2007, 11:38
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