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#7 - If grain prices double then the average price of a loaf

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Complete Question Explanation

Resolve the Paradox. The correct answer choice is (C)

The apparent discrepancy in this stimulus involves a comparison between the impact of an increase in grain prices on the price of grain-fed beef and the price of bread. In an attempt to confuse you, answer choices (B), (D), and (E) each focus on a comparison. However, each is incorrect because it focuses on the wrong comparison.

You are told than an increase in grain prices implies a significantly greater increase in the price of grain-fed beef than in the price of a loaf of bread. This difference is surprising, because one might assume that grain is a more significant input of bread than of grain-fed beef. Since we assume that grain reflects a greater percentage of the cost of producing bread than of the cost of producing grain-fed beef, we would think that the increase in grain prices would have a greater impact on the price of bread than on the price of grain-fed beef.

In this Resolve the Paradox question, the correct answer choice will actively resolve this apparent discrepancy by providing information that causes the increase in the price of grain to affect the price of grain-fed beef more dramatically than the average price of a loaf of bread.

Answer choice (A): The fact that farmers engaged in very large-scale cattle production generally try to reduce their labor costs does not explain why an increase in the price of grain, an input entirely distinct from labor, would cause the price of grain-fed beef to increase more than the average price of a loaf of bread.

Answer choice (B): This answer choices focuses on the wrong comparison. It is not the difference between the price per pound of grain-fed beef and the price per pound of bread that is at issue, but rather the difference in the effect of the increase in grain prices on the price of grain-fed beef and the price of bread.

Answer choice (C): This is the correct answer choice. This choice is correct, because it establishes that grain is a more significant input in the cost of production of grain-fed beef than it is in the cost of production of a loaf of bread. In fact, grain apparently represents most of the cost of production of grain-fed beef, while for bread most of the cost relates to labor and marketing.

Answer choice (D): As with answer choice (B), this answer focuses on the wrong comparison. The paradox did not involve a comparison between grass-fed beef and grain-fed beef, and so this information does not help to resolve the paradox.

Answer choice (E): This answer choice is incorrect because it does not address the role the price of grain played in either the cost of production of bread or of grain-fed beef. As with answer choices (B) and (D), this answer focuses on the wrong comparison.
smile22
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I have no idea how to resolve this question. I oftentimes struggle with numbers and percentage questions. I would appreciate any guidance that you can provide as to understanding the stimulus and how to answer it correctly.
Emily Haney-Caron
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Hi Smile,

The stimulus is presenting something that at first seems like a paradox: grain-fed beef and bread are both produced from grain, but grain-fed beef prices change in ratio to the cost of grain, while bread prices do not. We're looking for an answer choice that will resolve this apparent contradiction. C does just that: it explains that the cost of the grain is the main cost in producing grain-fed beef, so the price of wheat really controls the price of grain-fed beef, and the prices of the two move together. However, the cost of producing bread is made up mostly of costs other than the price of grain - the costs are mainly labor and marketing costs. Therefore, the price of bread goes up only a fraction of the percentage that the price of beef goes up, because it is less dependent on the price of grain.

Emily
smile22
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Thank you for the explanation!
ccampise
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I feel like this is an easy problem but I'm just not clicking with it. Although I gravitate toward C, the correct answer, I wouldn't be able to explain why it's correct. Can you guys clarify exactly why C is right and why the others are wrong? Thanks!
Nicholas Bruno
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Hey!

Sure thing! So the question is a "resolve the paradox" question. Start with identifying the paradox:

Price of grain doubles.
Bread price only increases 10-15% while price of grain-fed beef doubles.

We want to know why the discrepancy between the small increase in the price of bread and the large increase in the price of grain-fed beef.

C is correct because it explains that most of the cost of bread is through the labor costs (not grain) while the main cost of beef is the food. Thus, the price of grain would affect the cost of producing both differently and thus explains the discrepancy.

Hope this helps!
ccampise
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Ah ok that makes sense thanks! I think I was too focused on looking for a connection between the numbers and thought well 10-15% wouldn't necessarily cause a doubling in the price of grain fed cattle. Maybe I misidentified it as a #'s %'s problem and made it harder than it was
elysia
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Hi Powerscore Staff!

Thank you for your previous posts and I now understand what the paradox is and the explanation of why the increase of price in bread is less than the increase of price to feed and produce grain-fed beef. However, I'm having trouble understanding the wording in answer C. Could you please break it down for me?

Thank you!
Jonathan Evans
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Hi, Elysia,

Good question. So we ask ourselves, "Why is bread not going up that much but beef is going way up when grain prices increase?"

Consider each part of Answer Choice (C):

First, the bread price is mostly not determined by the cost of grain. Rather, according to the answer choice, the price of bread is mostly labor and marketing costs.

Now for the second part: The price of feeding cattle is most of the price of beef.

Here we have an answer for both parts of our question: The increase in grain has a smaller impact on bread price because it represents less of the price of bread. It causes a larger increase in beef prices because grain prices make up a huge expense in the production of beef.

Does this make more sense?
elysia
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Thank you Jonathan!

It clicked!! The costs of grain only represents say 20% bread production while labor and marketing represent the other 80%. For the beef say 65% of production costs are in feeding it with grain and thus the higher impact from the rise of grain prices. Thank you again!