In Order to Increase Profits During a Prolonged Slowdown in Sales, the Largest Manufacturers of Automobiles in the United States have Instituted Record-Setting Price Increases on all their Models.

Question: In order to increase profits during a prolonged slowdown in sales, the largest manufacturers of automobiles in the United States have instituted record-setting price increases on all their models. The manufacturers believe that this strategy will succeed, even though it is inconsistent with the normal relationship between price and demand.

The manufacturers' plan to increase profits relies on which of the following assumptions?

1. Automobile manufacturers will, of necessity, raise prices whenever they introduce a new model.
2. The smaller automobile manufacturers will continue to take away a large percentage of business from the largest manufacturers.
3. The increased profit made on cars sold will more than compensate for any decline in sales caused by the price increases.
4. New safety restraints that will soon become mandatory for all new cars will not be very costly for manufacturers to install.
5. Low financing and extended warranties will attract many price-conscious consumers.

“In order to increase profits during a prolonged slowdown in sales, the largest manufacturers of automobiles in the United States have instituted record-setting price increases on all their models.” - is a GMAT Critical question. This particular GMAT Critical Reasoning topic has been taken from the book ‘GMAT Official Guide Quantitative Review’ by Priceton review. In this particular topic candidates need to choose the option that best suits the passage. GMAT critical reasoning tests the logical and analytical skills of the candidates. Critical reasoning in GMAT requires candidates to find the strengths and weaknesses of the argument, or find the logical flaw in the argument. The GMAT CR section contains 10 -13 GMAT critical reasoning questions out of 36 GMAT verbal questions.

Answer: C
Explanation: GMAT critical reasoning tests the reasoning, logical and analytical thinking abilities of the candidate. The candidate has to deduce the correct option by finding the logically correct argument or by eliminating the irrelevant arguments.

1. Automobile manufacturers will, of necessity, raise prices whenever they introduce a new model.
   -Irrelevant to the argument. The argument already steed that the prices of models both old and new has been increased.
2. The smaller automobile manufacturers will continue to take away a large percentage of business from the largest manufacturers.
   -Irrelevant. In case this statement is negated as it is possible that the plan will work. This might increase profits for the large manufacturers, but it fails the negation test.
3. The increased profit made on cars sold will more than compensate for any decline in sales caused by the price increases.
   - Correct answer. Option C states thar the increase in profit made on cars sold is because of increased prices. It will be more than earlier amount for any reduction in sales which was again due to reduction in number of units sold. Hence, this sttetemnt breaks the argument, making the assumption true.
4. New safety restraints that will soon become mandatory for all new cars will not be very costly for manufacturers to install.
   -Irrelevant. The argument is about future plans to an increase the prices which is already live. But it the future restraints that weather it will be costly or not.
5. Low financing and extended warranties will attract many price-conscious consumers.
   -Completely irrelevant.

Suggested GMAT Critical Reasoning Questions

• All Teas are Served Hot or Iced Most Coffees are Served Hot or Iced and Always Contain Caffeine
• Without Adequate Amounts of Sleep Peoples Newly Acquired Skills
• Heavy Commitment by an Executive to a Course of Action
• The Fact that Superior Service can Generate a Competitive Advantage
• In the Wealth of Nations 1776 Scottish Economist Adam Smith Asserted
• In their Study of Whether Offering a Guarantee of Service
• The Year After a Company Whose Success Depends on Product Innovation has a Profitable Year
• It is an Odd but Indisputable Fact that the Seventeenth Century
• Research has Shown that Impoverished People in this Country Buy Unhealthy Snack Foods
• Arnold I was Recently Denied a Seat on an Airline Flight
• The Commissioner has Announced that Judge Khalid Who was on the Seven Member Panel
• Though the Press Release and Other Official Statements of Oil Companies
• The Rise in Free Do it Yourself Instructions on the Internet
• Some Statisticians Claim that the Surest Way to Increase the Overall Correctness
• In Patton City Days are Categorized as Having Heavy Rainfall
• A Librarian has a Set of Ten Books Including Four Different Books about Abraham Lincoln
• Whenever a Major Political Scandal Erupts Before an Election and Voters Blame the Scandal
• In Anticipation of the Coming Year Tecumseh Autos a National Auto Manufacturer
• Studies have Shown that a Large Percentage of Car Accidents are Caused by Aggressive
• If a Business Invests the Money Necessary to Implement Ecologically Sound Practices