V37-02

Question

In an isolated economy, only two factors can change the market price of a commodity: its supply and the consumer demand for it. When supply increases, the commodity’s price falls, and when supply decreases, the price rises. Conversely, when consumer demand increases, the price rises, and when demand decreases, the price falls. In such an economy, total consumer demand is directly proportional to population size.
 
If the statements above are true, which of the following must also be true?

A. If the population increases while the supply of a commodity remains unchanged, the market price of that commodity must fall.
B. If the population remains unchanged and the supply of a commodity increases, the market price of that commodity must decrease.
C. If the supply of a commodity decreases at the same time that the population increases, the market price of that commodity will remain unchanged.
D. If the population decreases and the supply of a commodity increases simultaneously, the market price of that commodity must increase.
E. Whatever changes occur in consumer demand, compensating changes in supply will necessarily keep the market price of every commodity constant.

Bunuel · Answer

Official Solution:

In an isolated economy, only two factors can change the market price of a commodity: its supply and the consumer demand for it. When supply increases, the commodity’s price falls, and when supply decreases, the price rises. Conversely, when consumer demand increases, the price rises, and when demand decreases, the price falls. In such an economy, total consumer demand is directly proportional to population size.
 
If the statements above are true, which of the following must also be true?

A. If the population increases while the supply of a commodity remains unchanged, the market price of that commodity must fall.
B. If the population remains unchanged and the supply of a commodity increases, the market price of that commodity must decrease.
C. If the supply of a commodity decreases at the same time that the population increases, the market price of that commodity will remain unchanged.
D. If the population decreases and the supply of a commodity increases simultaneously, the market price of that commodity must increase.
E. Whatever changes occur in consumer demand, compensating changes in supply will necessarily keep the market price of every commodity constant.

A) Incorrect. Population increases --> demand increases --> price rises, not falls.
 
B) Correct Answer. The population stays the same, so consumer demand does not change because demand is directly proportional to population size.The supply of the commodity increases, and the supply rule states that when supply increases the price falls. With no other factors acting, the price must therefore decrease. Hence statement B must be true.
 
C) Incorrect. Supply decreases (price rises) while population increases (demand rises --> price rises); both forces push price up, not keep it unchanged.
 
D) Incorrect. Population decreases (demand falls --> price falls) while supply increases (price falls); both forces push price down, not up.
 
E) Incorrect. The premises never guarantee that every demand change will be exactly offset by a supply change, so price could still move. This is incomplete.

Answer: B

leepcoast · Answer

So the argument says that commodity market prices are affected by 2 things: supply and demand. The demand is proportional to the population size.

It's important to say that GMAT requires test takers to know basic economic principles for some questions. In this case, you must know that if the supply of a good or service outstrips the demand for it, prices will fall. If demand exceeds supply, prices will rise.

A.  any  increase in the market price of a commodity is the result of a decrease in its supply 
We cannot say that ANY increase in market price would be result of a decrease in its supply. It may be result of a increase in total demand  > OUT

B. if the population size remains constant, an increase in the supply of a commodity will lead to a decrease in its market price 
As the argument says that the commodity market prices are affected by ONLY 2 things, if we keep population size constant, in other words, the demand constant, then based on basic economic principles an increase in supply will lead to a decrease in its market price  > KEEP

C. if there is a decrease in the population size, then, other things being equal, the market price of commodities must  increase  
If population size decreases, then demand would also decrease. But if supply stays equal, then market price would decrease (we would have lots of supply but low demand)  > OUT

D. the market price of a commodity is  inversely  related to the size of the population 
Let's think about it. If we have a larger population, we would have more demand and consequently prices would go up. So the market price is directly related to population size  > OUT

E. whatever changes in supply occur, there will be compensating changes in consumer demand 
Not necessarily. Nothing in the passage supports that one factor would compensate the other. We can have a scenario as option B, in which supply increases but demand remains constant  > OUT

The answer is option B

Invincible_147 · Answer

I did not quite understand the solution. Hi, The only reason i didnt pick B is the first time of reading was because i was not sure if we need to apply the general rules of economics here or not,that if supply is more then it will affect negativelty on the market price. We know that in general but i was not sure if we could apply it as its not specified that price is positvelity/negatively dependent on supply and demand.

bb · Answer

Hi. Good question. We are told this information:

So it would be easy to deduct the relationship but why not... It won't hurt and likely will improve the question. Thank you.   I can add clarification since the question is quite skimpy and it can use some extra padding of words.

bb · Answer

Clarification: actually I can't add this really as it will match the answer exactly and it won't be an inference question 😂
So I am going to leave it as is 😇

KaustubhShirsath · Answer

I don’t quite agree with the solution. why is option 4 wrong

bb · Answer

Hi  KaustubhShirsath , replying a second time as I botched my first reply.

Option 4 is actually the opposite if what it needs to be. 
Increase in population (greater demand) often  raises  the price if supply doesn’t change. This is the direct relationship between population and price, and the opposite of “inversely related.”

colhaox · Answer

I don’t quite agree with the solution. No where in the question, the basic economic principle is mentioned. Logics which lie outside of the scope of questions(self-knowledge) shouldn't be applied. Thus all the answers except E are incorrect, because all of them talk about relationship b/w demand and supply.

colhaox · Answer

I don’t quite agree with the solution. No where in the question, the basic economic principle is mentioned. Logics which lie outside of the scope of questions(self-knowledge) shouldn't be applied. Thus all the answers except E are incorrect, because all of them talk about relationship b/w demand and supply.

Prakruti_Patil · Answer

I did not quite understand the solution. demand supply inter relatiom is given in the argument, but how that plays out is not specified. In CR, can we assume general economic demand supply relationship if not spelled out?

hejwej · Answer

I would appreciate some some discussion around this comment on the GMAT as a whole, or maybe for the verbal section.

Of course as soon as I started reading the question i thought about the "basic concepts of economics." However, I have been training my brain to not make assumptions and take the question at face value. If the relationship between supply and demand was not given, I made sure not to assume it. And of course that came to hurt me because I picked E only because it did not assume a relationship.

I am quite frustrated with these convenient interpretations. Is the answer here that I should have assumed the "basics of economics" because none of the other answer choices made any sense? is that when i know? Would appreciate any direction in my thinking for GMAT, at least on the verbal section.

bb · Answer

Hey. Good question!

For the RC, your approach of not assuming or using outside knowledge is definitely good. 
On the CR, there is a fine line of what is included and what is not include on the CR as the passages are so short, often just a line or two. 
However, on this one it is probably justified to add one more sentence that defines the relationship between supply and demand and price, so you are not incorrect to call it out here and I really appreciate it. I have provided you with a 2-week extension as a thank you for your help and I have updated the question to include that tidbit of information.

-BB

kaushik2495 · Answer

I like the solution - it’s helpful.

V37-02

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