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16 Sep 2014, 01:46
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Difficulty:
45%
(medium)
Question Stats:
66% (01:48) correct
34%
(01:58)
wrong
based on 79
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Each year, company X signs a contract with shipping firm Y, stating that shipping firm Y will do all the company's international shipping. Shipping firm Y has a policy called "natural increases," which raises the price for the service that it provides to company X each year by an inflation-commensurate percentage of the previous year's shipping rates. This new price then becomes the baseline for the next year's increases; this policy is intended to let shipping firm Y make profits that keep pace with inflation.
Which of the following statements, if true, is the best basis for a criticism of "natural increases" as an economically sound practice for company X as it exists as part of the international shipping contract?
A. Company X's stockholders believe that Company X regularly spends more than it should on shipping costs.
B. This practice may cause company X to spend an increasingly large proportion of their profits on shipping as company Y's costs rise.
C. The rate of inflation has varied significantly over the past decade.
D. If shipping firm Y overcharged company X in the past, then company X will continue to overpay for shipping services.
E. The pricing method based on "natural increases" may discourage initiatives for company Y to develop and utilize new shipping routes.
Which of the following statements, if true, is the best basis for a criticism of "natural increases" as an economically sound practice for company X as it exists as part of the international shipping contract?
A. Company X's stockholders believe that Company X regularly spends more than it should on shipping costs.
B. This practice may cause company X to spend an increasingly large proportion of their profits on shipping as company Y's costs rise.
C. The rate of inflation has varied significantly over the past decade.
D. If shipping firm Y overcharged company X in the past, then company X will continue to overpay for shipping services.
E. The pricing method based on "natural increases" may discourage initiatives for company Y to develop and utilize new shipping routes.
16 Sep 2014, 01:46
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Official Solution:
Each year, company X signs a contract with shipping firm Y, stating that shipping firm Y will do all the company's international shipping. Shipping firm Y has a policy called "natural increases," which raises the price for the service that it provides to company X each year by an inflation-commensurate percentage of the previous year's shipping rates. This new price then becomes the baseline for the next year's increases; this policy is intended to let shipping firm Y make profits that keep pace with inflation.
Which of the following statements, if true, is the best basis for a criticism of "natural increases" as an economically sound practice for company X as it exists as part of the international shipping contract?
A. Company X's stockholders believe that Company X regularly spends more than it should on shipping costs.
B. This practice may cause company X to spend an increasingly large proportion of their profits on shipping as company Y's costs rise.
C. The rate of inflation has varied significantly over the past decade.
D. If shipping firm Y overcharged company X in the past, then company X will continue to overpay for shipping services.
E. The pricing method based on "natural increases" may discourage initiatives for company Y to develop and utilize new shipping routes.
Inflation causes money to lose value over time. Thus, the shipping firm Y adds a certain percentage each year to its previous year's prices in order to compensate for inflation. This, according to shipping firm Y, reflects "natural increases." We're asked to find the choice that provides a reason why this practice may not be economically sound for company X. That is, we want a reason why company X should not use this particular method to determine how much to pay firm Y.
Choice D is correct. This choice identifies a problem with "natural increases" that could cause company X to overpay year after year. If, in any one year, company Y overcharged company X, then the next year's price (and the year after that, and the year after that...) would cause company X to continue to pay for that mistake. This is due specifically to the section of the argument that claims that each year's new price then becomes the baseline for the next year's increases.
Choice A states that the stockholders of Company X believe that the company is overpaying for shipping. The beliefs of stockholders do not necessarily reflect the objective truth of the situation; moreover, the amount of money spent may not be directly reflective of the "natural increases" method by which the price of shipping is determined.
Choice B does not criticize the soundness of the "natural increases" method. It is reasonable that an increase in the cost to provide a service might represent a higher proportionof company X's profits; this, in itself, does not mean that the increase is too large. Think about it this way: If company X pays less for other services besides shipping each year, and slightly more for shipping, it would pay a higher proportion of its profits on shipping, but this does not mean that the practice of "natural increases" is unsound.
Choice C provides information about inflation. That's interesting, but it does little to indicate whether using inflation in the context of "natural increases" is an intelligent way to price shipping services. In a year with high inflation, it is not intrinsically unfair for shipping form Y to ask for a proportionately higher price.
Whether or not new shipping routes are used by firm Y, as discussed in answer choice E, is solely an issue for firm Y, and not company X. There is no necessary connection between shipping routes and economic efficiency. We can eliminate this answer.
Answer: D
Each year, company X signs a contract with shipping firm Y, stating that shipping firm Y will do all the company's international shipping. Shipping firm Y has a policy called "natural increases," which raises the price for the service that it provides to company X each year by an inflation-commensurate percentage of the previous year's shipping rates. This new price then becomes the baseline for the next year's increases; this policy is intended to let shipping firm Y make profits that keep pace with inflation.
Which of the following statements, if true, is the best basis for a criticism of "natural increases" as an economically sound practice for company X as it exists as part of the international shipping contract?
A. Company X's stockholders believe that Company X regularly spends more than it should on shipping costs.
B. This practice may cause company X to spend an increasingly large proportion of their profits on shipping as company Y's costs rise.
C. The rate of inflation has varied significantly over the past decade.
D. If shipping firm Y overcharged company X in the past, then company X will continue to overpay for shipping services.
E. The pricing method based on "natural increases" may discourage initiatives for company Y to develop and utilize new shipping routes.
Inflation causes money to lose value over time. Thus, the shipping firm Y adds a certain percentage each year to its previous year's prices in order to compensate for inflation. This, according to shipping firm Y, reflects "natural increases." We're asked to find the choice that provides a reason why this practice may not be economically sound for company X. That is, we want a reason why company X should not use this particular method to determine how much to pay firm Y.
Choice D is correct. This choice identifies a problem with "natural increases" that could cause company X to overpay year after year. If, in any one year, company Y overcharged company X, then the next year's price (and the year after that, and the year after that...) would cause company X to continue to pay for that mistake. This is due specifically to the section of the argument that claims that each year's new price then becomes the baseline for the next year's increases.
Choice A states that the stockholders of Company X believe that the company is overpaying for shipping. The beliefs of stockholders do not necessarily reflect the objective truth of the situation; moreover, the amount of money spent may not be directly reflective of the "natural increases" method by which the price of shipping is determined.
Choice B does not criticize the soundness of the "natural increases" method. It is reasonable that an increase in the cost to provide a service might represent a higher proportionof company X's profits; this, in itself, does not mean that the increase is too large. Think about it this way: If company X pays less for other services besides shipping each year, and slightly more for shipping, it would pay a higher proportion of its profits on shipping, but this does not mean that the practice of "natural increases" is unsound.
Choice C provides information about inflation. That's interesting, but it does little to indicate whether using inflation in the context of "natural increases" is an intelligent way to price shipping services. In a year with high inflation, it is not intrinsically unfair for shipping form Y to ask for a proportionately higher price.
Whether or not new shipping routes are used by firm Y, as discussed in answer choice E, is solely an issue for firm Y, and not company X. There is no necessary connection between shipping routes and economic efficiency. We can eliminate this answer.
Answer: D
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