#15 - Grow-Again ointment is a proven treatment for

[Administrator]

Complete Question Explanation

Strengthen-CE. The correct answer choice is (C)

The conclusion in this stimulus is found in the last sentence: offering a rebate, essentially a price reduction, will not increase the quantity of sales. This seems to cut against basic economic theory, which predicts that price and quantity are inversely related to a price reduction should increase the quantity of sales. How can we support this conclusion? If Grow-Again holds a monopoly in the anti-baldness market, then perhaps Grow-Again already has drawn all the potential customers in the market, and lower prices will not induce them to purchase more quantity (because, as the stimulus states in the second sentence, exceeding the recommended dose does not increase the product's effectiveness). But what if consumers are not all currently purchasing as much as five drops, the recommended dose? Also, what if consumers, refusing to heed science, want to purchase more than five drops anyway? In either of these cases, it is plausible that a price reduction could increase quantity of sales, and the stimulus conclusion would fail.

Also, what if Grow-Again is not a monopoly, but rather has competitors selling similar products? If this is the case, then Grow-Again probably could increase sales by drawing competitors' customers with a lower price. Again, the stimulus conclusion would fail.

In order to strengthen the argument, we need to remove the possibility that one of the critiques above is true.

[A final argument supporting the conclusion might be that consumers are lazy, and they end up not following through on obtaining the rebate. Still, most consumers probably do not predict their own laziness in advance, so ex ante they perceive the rebate offer as a price reduction. This actually would not be a very good argument in support of the conclusion.]

Answer choice (A): This answer choice tends to weaken the argument. As suggested above, and echoed by this answer choice, consumers may believe that using higher-than-recommended quantities of the ointment can be effective, regardless of scientific advice. Thus, a price reduction could spur consumers to purchase higher quantities.

Answer choice (B): This answer choice is totally irrelevant to the argument. Heterogeneity in consumers' preferences for the drug, or their responses to the drug, should not influence the price-quantity relationship.

Answer choice (C): This is the correct answer choice, because it removes one of the critiques stated above: that a price reduction could attract competitors' customers. By removing this critique, we do not fully complete the argument (several holes still remain), but we do strengthen the argument.

Answer choice (D): That some baldness is not caused by hereditary factors, and thus some bald men have no use for Grow-Again and its (possible) competitor products, is irrelevant to our analysis of the market for anti-hereditary-baldness ointment.

Answer choice (E): This answer choice is analyzing the cost side of the Grow-Again business. The argument in the stimulus dealt only with the revenue side, which is completely independent of the cost side.

[desmail]

Hi,

I am having issues understanding answer E.

I can kind of see where it is wrong, in that even if it is cheap/expensive to manufacture the product it wont matter, because people are not buying large quantities anyway, right?

But, if the cost does not fall much, that means that it is not worth producing in bulk. So therefore, they should not produce in large quantities, and thus should not offer a rebate. Usually strengthen questions allow answers that are out of scope, and sometimes dont directly address the conclusion, right? As long as it strengthens it a little...

Also, C is correct because if the rebate would not change a persons mind in buying it, its not worth offering to begin with? Thats a tricky answer because of the "who otherwise might not.."

Thank you in advance!
Dana

[Dave Killoran]

Hi Dana,

With (C), they are basically saying that the only people who would use the rebate are the current users of Grow-again, and thus the rebate offer wouldn't attract new users. If (C) is true, you're just giving money back to your existing user base without obtaining new customers. This strengthens the idea that the rebate won't increase sales and is therefore a bad idea. As you note, though, the language is tricky.

In (E), I see this as a completely different issue from the rebate. To me, in the conclusion the rebate idea somewhat comes out of the blue. So, to strengthen that big leap, I want an answer that will give some direct support to the rebate idea. You are correct that "new information" answers are viable in strengthen questions, and they don't necessarily have to directly address the conclusion, but here my first thought is that manufacturing costs are pretty far afield from the idea of a rebate affecting sales (the rebate is a consumer-side issue, whereas (E) address a manufacturing-side issue). Because the rebate is a said to "not increase sales," I'd really like to see something address that. Plus, we have no idea how Grow-again is manufactured. It may already be manufactured in large quantities, in which case (E) is irrelevant. If it is currently produced in small quantities, then it still doesn't address the sales aspect of the rebate. So, while out-of-scope answers are allowable, this one is too far out of scope I'd day.

Finally, note that you are making a big assumption in saying: "if the cost does not fall much, that means that it is not worth producing in bulk." For example, let's say that I can manufacture a product in small quantities for $1.01 each and sell it for $1000 each. Let's say that if I manufacture it in bulk the production cost drops to $1.00. I think we'd both agree that could still very easily be worth producing in bulk

Please let me know if that helps. Thanks!