Critical Reasoning

In the past, every ten-percentage-point increase in cigarette prices in the country of Coponia has decreased per capita sales of cigarettes by four percent. Coponia is about to raise taxes on cigarettes by 9 cents per pack. The average price of cigarettes in Coponia is and has been for more than a year 90 cents per pack. So the tax hike stands an excellent chance of reducing per capita sales of cigarettes by four percent. Which of the following is an assumption on which the argument depends?

A. Tobacco companies are unlikely to reduce their profit per pack of cigarettes to avoid an increase in the cost per pack to consumers in Coponia.
B. Previous increases in cigarette prices in Coponia have generally been due to increases in taxes on cigarettes.
C. Any decrease in per capita sales of cigarettes in Coponia will result mainly from an increase in the number of people who quit smoking entirely.
D. At present, the price of a pack of cigarettes in Coponia includes taxes that amount to less than ten percent of the total selling price.
E. The number of people in Coponia who smoke cigarettes has remained relatively constant for the past several years.

IMO it should be (A). My reason is - In the past every 10% increase in price has decreased per capita sales by 4%. A 10% increase in tax would have the same effect. So, 10% increase in tax is linked to cigarettes price by the assumption that the tobacco companies will not lower their margin to avoid an increase in the cigarettes price. Or in other words if we remove this assumption then the argument fails.

Received a PM.

So the argument goes like this:
- in the past, 10% price increase for cigarettes has lowered per capita consumption by 4%
- right now, there will be a 9 cents tax added, while the current price of the cigarettes is 90 cents
- since 10% of 90 is 9 cents, this means that per capita consumption should go down by 4%

The boldfaced and underlined parts are price and tax. There is a crucial difference between the two! Adding a tax of 10 dollars to apples does not necessarily increase the price of apples by 10 dollars, since most of the time the orchard owner will also take a hit. The consumer might be paying an extra 8 dollars per pound of apples, while the producer will have to bear the brunt of the other 2 dollars. This is something you might be familiar with if you've taken a Microeconomics class. If not, prepare yourself for the concepts of elasticity in supply and demand, because you'll certainly hear of these in business school.

Now, A fits perfectly in this scenario. It basically fills the gap between the tax increase and the price increase: if the producer will not take the hit of 2 dollars, then the consumer might have to pay for the whole increase in price of apples. The same holds true for cigarettes. If the producers will not make it easier for consumers, i.e. if they don't accept a decrease in profits, then the price of cigarettes will indeed be raised by the full 10%. This historically makes consumers give up on 4% of their cigarettes.

B is irrelevant because we're not discussing the source of the increase in prices. The source does not matter, as long as the increase is of 10%.

C is also unrelated to the argument, which concerns decreases in per capita consumption as a result of a hike in prices and nothing else.

I am usually weary of unrealistic answer choices such as D! Paying just 10% taxes on cigarettes is really, really impossible anywhere in the world. Cigarettes, as "luxury and vice" products, are taxed heavily! But anyway, regardless of the "common sense" objection, this option does not work. Even if the taxes are just 9% of the selling price, i.e. 8.1 cents, a 9 cents increase in taxes is simply 10% of the price for cigarettes and it's unrelated to the initial amount of taxation.

E is irrelevant again because of the boldfaced part in my list above: per capita. Per capita consumption is really the issue here, so the increase/decrease of smokers does not affect this measure.

Thanks for that explanation. It makes perfect sense now....

DanaJ wrote:Received a PM.

So the argument goes like this:
- in the past, 10% price increase for cigarettes has lowered per capita consumption by 4%
- right now, there will be a 9 cents tax added, while the current price of the cigarettes is 90 cents
- since 10% of 90 is 9 cents, this means that per capita consumption should go down by 4%

The boldfaced and underlined parts are price and tax. There is a crucial difference between the two! Adding a tax of 10 dollars to apples does not necessarily increase the price of apples by 10 dollars, since most of the time the orchard owner will also take a hit. The consumer might be paying an extra 8 dollars per pound of apples, while the producer will have to bear the brunt of the other 2 dollars. This is something you might be familiar with if you've taken a Microeconomics class. If not, prepare yourself for the concepts of elasticity in supply and demand, because you'll certainly hear of these in business school.

Now, A fits perfectly in this scenario. It basically fills the gap between the tax increase and the price increase: if the producer will not take the hit of 2 dollars, then the consumer might have to pay for the whole increase in price of apples. The same holds true for cigarettes. If the producers will not make it easier for consumers, i.e. if they don't accept a decrease in profits, then the price of cigarettes will indeed be raised by the full 10%. This historically makes consumers give up on 4% of their cigarettes.

B is irrelevant because we're not discussing the source of the increase in prices. The source does not matter, as long as the increase is of 10%.

C is also unrelated to the argument, which concerns decreases in per capita consumption as a result of a hike in prices and nothing else.

I am usually weary of unrealistic answer choices such as D! Paying just 10% taxes on cigarettes is really, really impossible anywhere in the world. Cigarettes, as "luxury and vice" products, are taxed heavily! But anyway, regardless of the "common sense" objection, this option does not work. Even if the taxes are just 9% of the selling price, i.e. 8.1 cents, a 9 cents increase in taxes is simply 10% of the price for cigarettes and it's unrelated to the initial amount of taxation.

E is irrelevant again because of the boldfaced part in my list above: per capita. Per capita consumption is really the issue here, so the increase/decrease of smokers does not affect this measure.

Great explanation DANA.

DanaJ wrote:Received a PM.

So the argument goes like this:
- in the past, 10% price increase for cigarettes has lowered per capita consumption by 4%
- right now, there will be a 9 cents tax added, while the current price of the cigarettes is 90 cents
- since 10% of 90 is 9 cents, this means that per capita consumption should go down by 4%

The boldfaced and underlined parts are price and tax. There is a crucial difference between the two! Adding a tax of 10 dollars to apples does not necessarily increase the price of apples by 10 dollars, since most of the time the orchard owner will also take a hit. The consumer might be paying an extra 8 dollars per pound of apples, while the producer will have to bear the brunt of the other 2 dollars. This is something you might be familiar with if you've taken a Microeconomics class. If not, prepare yourself for the concepts of elasticity in supply and demand, because you'll certainly hear of these in business school.

Now, A fits perfectly in this scenario. It basically fills the gap between the tax increase and the price increase: if the producer will not take the hit of 2 dollars, then the consumer might have to pay for the whole increase in price of apples. The same holds true for cigarettes. If the producers will not make it easier for consumers, i.e. if they don't accept a decrease in profits, then the price of cigarettes will indeed be raised by the full 10%. This historically makes consumers give up on 4% of their cigarettes.

B is irrelevant because we're not discussing the source of the increase in prices. The source does not matter, as long as the increase is of 10%.

C is also unrelated to the argument, which concerns decreases in per capita consumption as a result of a hike in prices and nothing else.

I am usually weary of unrealistic answer choices such as D! Paying just 10% taxes on cigarettes is really, really impossible anywhere in the world. Cigarettes, as "luxury and vice" products, are taxed heavily! But anyway, regardless of the "common sense" objection, this option does not work. Even if the taxes are just 9% of the selling price, i.e. 8.1 cents, a 9 cents increase in taxes is simply 10% of the price for cigarettes and it's unrelated to the initial amount of taxation.

E is irrelevant again because of the boldfaced part in my list above: per capita. Per capita consumption is really the issue here, so the increase/decrease of smokers does not affect this measure.

Hi Dana,

Please explain option E in more details....

The argument concerns per capita consumption of cigarettes, i.e. the average consumption of cigarettes of each person. The number of people who smoke is not important, since we're only interested in the average (whatever that average is).

The argument concerns per capita consumption of cigarettes, i.e. the average consumption of cigarettes of each person. The number of people who smoke is not important, since we're only interested in the average (whatever that average is).

I am a bit confused here. Not really clear ..

Per capita consumption of cigarettes, i.e. the average consumption of cigarettes of each person

So if no of people who smoke goes up, and say sales of cigarettes remain constant , then Per capita consumption of cigarettes will go down.
On the other hand , if no of people who smoke goes up, and say sales of cigarettes increase , then Per capita consumption of cigarettes will increase.

Is my understanding right here?

sachindia wrote:

The argument concerns per capita consumption of cigarettes, i.e. the average consumption of cigarettes of each person. The number of people who smoke is not important, since we're only interested in the average (whatever that average is).

I am a bit confused here. Not really clear ..

Per capita consumption of cigarettes, i.e. the average consumption of cigarettes of each person

So if no of people who smoke goes up, and say sales of cigarettes remain constant , then Per capita consumption of cigarettes will go down.
On the other hand , if no of people who smoke goes up, and say sales of cigarettes increase , then Per capita consumption of cigarettes will increase.

Is my understanding right here?

I somehow don't understand your statements because -

1) I think you are considering the two things independent of each other
No of people who smoke goes up is one, and second is sales of cigarettes increase is the other.
I think it needs to be a causal relation to really show that the sales of cigarettes have increased because more people have started smoking.
It can also be possible that the number of people who smoke does not increase, but the people who were already smoking increased the intake of cigarettes ? So eventually, even if the total number of people does not increase and the no of cigs consumed increases, the average surely goes up.

Am I right here ?


Thanks,
Ankit

Hi ankit,
Say no of people who smoke has gone up but the no of cigarates smoked/person goes down.. so sales may decrease

I am just trying to see if my understanding of the following is correct:
Per capita consumption of cigarettes, i.e. the average consumption of cigarettes of each person

I know that E cant be right cause if you negate, conclusion doesnt fall.

Hi Dana,

Thanks for your explanation! I initially chose B, and even after your explanation, I think B has to be an assumption. The argument says that because when X happened in the past, Y happened, that we can expect Y to happen again because X is about to happen. As B states, if X wasn't really the main reason Y happened, then the argument doesn't hold water.

Am I missing something here? I have tried unsuccessfully to see how B is irrelevant.

Thank you!

DanaJ wrote:Received a PM.

So the argument goes like this:
- in the past, 10% price increase for cigarettes has lowered per capita consumption by 4%
- right now, there will be a 9 cents tax added, while the current price of the cigarettes is 90 cents
- since 10% of 90 is 9 cents, this means that per capita consumption should go down by 4%

The boldfaced and underlined parts are price and tax. There is a crucial difference between the two! Adding a tax of 10 dollars to apples does not necessarily increase the price of apples by 10 dollars, since most of the time the orchard owner will also take a hit. The consumer might be paying an extra 8 dollars per pound of apples, while the producer will have to bear the brunt of the other 2 dollars. This is something you might be familiar with if you've taken a Microeconomics class. If not, prepare yourself for the concepts of elasticity in supply and demand, because you'll certainly hear of these in business school.

Now, A fits perfectly in this scenario. It basically fills the gap between the tax increase and the price increase: if the producer will not take the hit of 2 dollars, then the consumer might have to pay for the whole increase in price of apples. The same holds true for cigarettes. If the producers will not make it easier for consumers, i.e. if they don't accept a decrease in profits, then the price of cigarettes will indeed be raised by the full 10%. This historically makes consumers give up on 4% of their cigarettes.

B is irrelevant because we're not discussing the source of the increase in prices. The source does not matter, as long as the increase is of 10%.

C is also unrelated to the argument, which concerns decreases in per capita consumption as a result of a hike in prices and nothing else.

I am usually weary of unrealistic answer choices such as D! Paying just 10% taxes on cigarettes is really, really impossible anywhere in the world. Cigarettes, as "luxury and vice" products, are taxed heavily! But anyway, regardless of the "common sense" objection, this option does not work. Even if the taxes are just 9% of the selling price, i.e. 8.1 cents, a 9 cents increase in taxes is simply 10% of the price for cigarettes and it's unrelated to the initial amount of taxation.

E is irrelevant again because of the boldfaced part in my list above: per capita. Per capita consumption is really the issue here, so the increase/decrease of smokers does not affect this measure.

Premise: increase in price reduces per capita sales.

Conclusion: increase in tax will reduce per capita sales.

B is out of scope.
C is a weakner.
D is irrelevant, the amount of taxes present in the price and the way it would impact the post tax price is not mentioned in the premise. So this one becomes irrelevant, as it fails to impact the per capita sales.

E fails to establish a connection between tax and price.
Also, per capita is on total population. Here an increase or an decrease in the number of people smoking and its impact on the total count is not definite.. ex the population have declined where as the number of people smoking have increased..

showbu wrote:In the past, every ten-percentage-point increase in cigarette prices in the country of Coponia has decreased per capita sales of cigarettes by four percent. Coponia is about to raise taxes on cigarettes by 9 cents per pack. The average price of cigarettes in Coponia is and has been for more than a year 90 cents per pack. So the tax hike stands an excellent chance of reducing per capita sales of cigarettes by four percent. Which of the following is an assumption on which the argument depends?

A. Tobacco companies are unlikely to reduce their profit per pack of cigarettes to avoid an increase in the cost per pack to consumers in Coponia.
B. Previous increases in cigarette prices in Coponia have generally been due to increases in taxes on cigarettes.
C. Any decrease in per capita sales of cigarettes in Coponia will result mainly from an increase in the number of people who quit smoking entirely.
D. At present, the price of a pack of cigarettes in Coponia includes taxes that amount to less than ten percent of the total selling price.
E. The number of people in Coponia who smoke cigarettes has remained relatively constant for the past several years.

Dear GMATGuru,

Why is choice D wrong? How do we reach the assumption in this question?

Mo2men wrote:

showbu wrote:In the past, every ten-percentage-point increase in cigarette prices in the country of Coponia has decreased per capita sales of cigarettes by four percent. Coponia is about to raise taxes on cigarettes by 9 cents per pack. The average price of cigarettes in Coponia is and has been for more than a year 90 cents per pack. So the tax hike stands an excellent chance of reducing per capita sales of cigarettes by four percent. Which of the following is an assumption on which the argument depends?

A. Tobacco companies are unlikely to reduce their profit per pack of cigarettes to avoid an increase in the cost per pack to consumers in Coponia.
B. Previous increases in cigarette prices in Coponia have generally been due to increases in taxes on cigarettes.
C. Any decrease in per capita sales of cigarettes in Coponia will result mainly from an increase in the number of people who quit smoking entirely.
D. At present, the price of a pack of cigarettes in Coponia includes taxes that amount to less than ten percent of the total selling price.
E. The number of people in Coponia who smoke cigarettes has remained relatively constant for the past several years.

Dear GMATGuru,

Why is choice D wrong? How do we reach the assumption in this question?

Plan:
Raises the cigarette tax by 9 cents per pack.
Prediction:
Per capital sales will be reduced by 4 percent.

Why is the plan expected succeed?
In the past, every ten-percentage-point increase in cigarette prices in the country of Coponia has decreased per capita sales of cigarettes by four percent.
What does the plan assume?
The 9-cent tax increase = a ten-percentage-point increase in cigarette prices.
If the new tax does not lead to a 10% increase in the cost of a pack of cigarettes, then the argument cannot conclude that cigarette sales will decrease by 4 percent.

Option A, negated:
Tobacco companies are likely to reduce their profit per pack to avoid an increase in the cost per pack to consumers in Coponia.
Here, companies are likely to reduce their profits so that the total cost of a pack of cigarettes does NOT increase, invalidating the conclusion that cigarette sales will decrease by 4 percent.
Since the negation of A invalidates the conclusion, A constitutes an ASSUMPTION: a statement that MUST BE TRUE for the conclusion to hold.

The correct answer is A.

D, negated:
At present, the price of a pack of cigarettes in Coponia includes taxes that amount to ten percent or more of the total selling price.
It does not matter what portion of the current 90-cent selling price can be attributed to taxes: a tax increase of 9 cents will still constitute a ten-percent increase in the total selling price.
As a result, the argument may still conclude that sales will decrease by 4 percent.
Since the negation of D does not invalidate the conclusion, eliminate D.