G-PreRC passage: The general density dependence model

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GMAT-Prep RC: Final solution at one place:

The general density dependence model can be applied to explain the founding of specialist firms (those attempting to serve a narrow target market). According to this model, specialist foundings hinge on the interplay between legitimation and competitive forces, both of which are functions of the density (total number) of firms in a particular specialist population. Legitimation occurs as a new type of firm moves from being viewed as unfamiliar to being viewed as a natural way to organize. At low density levels, each founding increases legitimation, reducing barriers to entry and easing subsequent foundings. Competition occurs because the resources that firms seek - customers, suppliers, and employees - are limited, but as long as density is low relative to plentiful resources, the addition of another firm has a negligible impact on the intensity of competition. At high density levels, however, competitive effects outweigh legitimation effects, discouraging foundings. The more numerous the competitors, the fiercer the competition will be and the smaller will be the incentive for new firms to enter the field.

While several studies have found a significant correspondence between the density dependence model and actual patterns of foundings, other studies have found patterns not consistent with the model. A possible explanation for this inconsistency is that legitimation and competitive forces transcend national boundaries, while studies typically restrict their analysis to the national level. Thus a national-level analysis can understate the true legitimation and competitive forces as well as the number of foundings in an industry that is internationally integrated. Many industries are or are becoming international, and since media and information easily cross national borders, so should legitimation and its effects on overseas foundings. For example, if a type of firm becomes established in the United States, that information transcends borders, reduces uncertainties, and helps foundings of that type of firm in other countries. Even within national contexts, studies have found more support for the density dependence model when they employ broader geographic units of analysis-for example, finding that the model's operation is seen more clearly at the state and national levels than at city levels.

The primary purpose of the passage is to
(A) question the validity of an economic model
(B) point out some inconsistencies within an economic model
(C) outline an economic model and suggest revisions to it
(D) describe an economic model and provide specific examples to illustrate its use
(E) explain why an economic model remains valid despite inconsistent research results

(A) Incorrect - The author does not question of the validity of the economic model anywhere in the passage. In fact, the first line suggests that it can be applied to explain foundings. The author is also looking to explain discrepant findings in Paragraph 2.

(B) Incorrect - Though the author does point of inconsistencies between certain studies and the economic model, that is not the primary purpose of the passage as the author is consistently trying to justify the model's use.

(C) Incorrect - The author is not suggesting any revisions in his passage.

(D) Incorrect - The author does not provide multiple examples illustrating the use of the General Density Dependence model.

(E) Correct - The author explains that the Economic Model can be used by justifying inconsistent results of study findings. The inconsistencies occur because certain factors (such as internalization) are ignored and not because the model is bad. A simple analogy will be the effect of a particular medicine: the fact that the patient does not follow the instructions properly can't be the grounds for the ill-effect of the medicine.