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CR - Assumption

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CR - Assumption

by karthikpandian19 » Sat Jun 30, 2012 3:37 am
The CEO of a nationwide bookstore company plans to increase profits by instituting a 10 percent price increase on all merchandise sold by any store owned and maintained by the company, despite the fact that sales have been slightly decreasing continually for the last five years. Even though this plan runs counter to the traditional relationship between price and demand, the CEO believes that it will succeed in raising profits.

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


(A) The bookstore company's number of sales will not continue to decrease at the same rate for the next five years at which they have been decreasing for the last five years.

(B) The bookstore's customers are almost completely insensitive to price.

(C) The increased revenues resulting from the price increase will be greater than the losses in sales incurred as a result of this practice.

(D) The company's customer base prefers live bookstores to online booksellers, despite the increasing ability of online booksellers to undercut the store's prices.

(E) The customers of the stores owned and maintained by the bookstore are currently paying as much as they are willing to pay for the bookstore's products.
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by Birottam Dutta » Sat Jun 30, 2012 4:48 am
The CEO of a nationwide bookstore company plans to increase profits by instituting a 10 percent price increase on all merchandise sold by any store owned and maintained by the company, despite the fact that sales have been slightly decreasing continually for the last five years. Even though this plan runs counter to the traditional relationship between price and demand, the CEO believes that it will succeed in raising profits.

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


(A) The bookstore company's number of sales will not continue to decrease at the same rate for the next five years at which they have been decreasing for the last five years. -- Incorrect, this argument is about the strategy, not about past 5 year data.

(B) The bookstore's customers are almost completely insensitive to price.-- Out of scope

(C) The increased revenues resulting from the price increase will be greater than the losses in sales incurred as a result of this practice. -- Correct, this is what the underlying assumption pertaining to this new strategy is.

(D) The company's customer base prefers live bookstores to online booksellers, despite the increasing ability of online booksellers to undercut the store's prices. -- Out of scope
(E) The customers of the stores owned and maintained by the bookstore are currently paying as much as they are willing to pay for the bookstore's products.-- Out of scope
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by vk_vinayak » Sat Jun 30, 2012 4:53 am
+1 for C.
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by sandeep_thaparianz » Sat Jun 30, 2012 5:22 am
+1 forC
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by karthikpandian19 » Sun Jul 01, 2012 8:45 pm
OA is C

The CEO reasons that increasing prices by 10 percent will result in increased profits. However, this strategy goes against the traditional price and demand relationship (the more expensive a product is, the less willing people are to buy it). Still, the CEO thinks the the price hike is a good idea and will raise revenue - why? The CEO must be assuming that the higher prices will increase the revenue generated by each book sale enough to make up for any decrease in the number of books sold.

Choice C is correct. It says that the revenues made by the sales hike will more than make up for the potential loss in sales. This matches our understanding of the CEO's thought process.

Choice A is incorrect because the CEO's plan is to raise prices, which could increase profits even if sales continued to decrease. The CEO might be accounting for a continual decrease in sales in her prediction, hoping that the increased price on all items will raise profits anyway.

Choice B is extreme. It is not necessary for customers to be "almost completely insensitive to price," only insensitive enough so that the loss in sales due to a 10% price hike doesn't outweigh the extra profit gained.

Choice D mentions online booksellers, and the fact that customers will continue to loyal in spite of their competition, but concerns about competition are not mentioned in the passage. Online booksellers are irrelevant to the argument, so this answer choice can be eliminated.

Finally, choice E is exactly the opposite of what the CEO is assuming. The CEO must believe that customers (at least, some customers) would be willing to pay for a 10 percent price increase in order for the bookstore's profits to increase. This choice states the exact opposite of this assumption.

Choice C is correct.
karthikpandian19 wrote:The CEO of a nationwide bookstore company plans to increase profits by instituting a 10 percent price increase on all merchandise sold by any store owned and maintained by the company, despite the fact that sales have been slightly decreasing continually for the last five years. Even though this plan runs counter to the traditional relationship between price and demand, the CEO believes that it will succeed in raising profits.

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


(A) The bookstore company's number of sales will not continue to decrease at the same rate for the next five years at which they have been decreasing for the last five years.

(B) The bookstore's customers are almost completely insensitive to price.

(C) The increased revenues resulting from the price increase will be greater than the losses in sales incurred as a result of this practice.

(D) The company's customer base prefers live bookstores to online booksellers, despite the increasing ability of online booksellers to undercut the store's prices.

(E) The customers of the stores owned and maintained by the bookstore are currently paying as much as they are willing to pay for the bookstore's products.
Regards,
Karthik
The source of the questions that i post from JUNE 2013 is from KNEWTON

---If you find my post useful, click "Thank" :) :)---
---Never stop until cracking GMAT---
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