A product that represents a clear technological advance over competing products can generally command a high price. Because technological advances...

GMAT Critical Reasoning : (CR) Questions

Source: Official Guide

Critical Reasoning

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A product that represents a clear technological advance over competing products can generally command a high price. Because technological advances tend to be quickly surpassed and companies want to make large profits while they still can, many companies charge the greatest price the market will bear when they have such a product. But large profits on the new product will give competitors a strong incentive to quickly match the new product's capabilities. Consequently, the strategy to maximize overall profit from a new product is to charge less than the greatest possible price.

In the argument above, the two portions in boldface play which of the following roles?

The first is an assumption that forms the basis for a course of action that the argument criticizes; the second presents the course of action endorsed by the argument.

The first is a consideration raised to explain the appeal of a certain strategy; the second is a consideration raised to call into question the wisdom of adopting that strategy.

The first is an assumption that has been used to justify a certain strategy; the second is a consideration that is used to cast doubt on that assumption.

The first is a consideration raised in support of a strategy the argument endorses; the second presents grounds in support of that consideration.

The first is a consideration raised to show that adopting a certain strategy is unlikely to achieve the intended effect; the second is presented to explain the appeal of that strategy.

Solution

Understanding the Passage

Text from Passage	Analysis
"A product that represents a clear technological advance over competing products can generally command a high price."	What it says: When a company creates a product with better technology than what competitors offer, they can usually charge customers more money for it. Visualization: iPhone with new camera technology: $1200 vs. competitors with older cameras: $800 What it does: This establishes the foundation that technological superiority leads to pricing power. Source: Author's view
(Boldface 1) "Because technological advances tend to be quickly surpassed and companies want to make large profits while they still can, many companies charge the greatest price the market will bear when they have such a product."	What it says: Since new technology gets outdated fast and companies want to maximize profits during their advantage period, most companies charge the absolute highest price customers will pay. Visualization: Company launches revolutionary smartphone at $1500 (maximum customers will pay) because in 6 months, competitors will have similar technology and price will drop to $900 What it does: This explains why companies typically pursue maximum pricing strategies - because their technological advantage is temporary. Source: Author's view (describing common business practice)
(Boldface 2) "But large profits on the new product will give competitors a strong incentive to quickly match the new product's capabilities."	What it says: However, when a company makes huge profits from their new product, this motivates competitors to rapidly develop similar technology to capture some of those profits. Visualization: Company A makes $500 profit per unit on revolutionary product → Competitors see this → Competitors invest heavily to create similar product within 3 months instead of usual 12 months What it does: This introduces a key problem with maximum pricing - it actually speeds up competitive response, shortening the advantage period. Source: Author's view
"Consequently, the strategy to maximize overall profit from a new product is to charge less than the greatest possible price."	What it says: Therefore, to make the most total money from a new product over time, companies should charge less than the maximum price they could get. Visualization: Strategy 1: Charge $1500 max price → Competitors respond in 3 months → Total profit over 12 months: $2M vs. Strategy 2: Charge $1200 moderate price → Competitors respond in 8 months → Total profit over 12 months: $3.2M What it does: This presents the author's main conclusion - a counterintuitive pricing strategy that maximizes long-term rather than short-term profits. Source: Author's view

Overall Structure

The author is presenting a strategic business argument that challenges conventional pricing wisdom. The flow moves from establishing basic pricing principles, to explaining typical company behavior, to revealing a flaw in that behavior, to proposing a better alternative strategy.

Main Conclusion: The strategy to maximize overall profit from a new product is to charge less than the greatest possible price.

Boldface Segments

Boldface 1: technological advances tend to be quickly surpassed and companies want to make large profits while they still can
Boldface 2: large profits on the new product will give competitors a strong incentive to quickly match the new product's capabilities

Boldface Understanding

Boldface 1 Analysis:

Function: This provides the reasoning behind why most companies choose maximum pricing strategies
Direction: This supports the author's ultimate position by explaining the logic that leads to the problematic behavior the author wants to correct

Boldface 2 Analysis:

Function: This identifies the key problem with maximum pricing strategies - they accelerate competitive response
Direction: This supports the author's ultimate position by providing the crucial reason why maximum pricing backfires

Structural Classification

Boldface 1:

Structural Role: Background reasoning that explains common business behavior
Predicted Answer Patterns: "explains why companies adopt a particular strategy" or "provides reasoning for a common business practice"

Boldface 2:

Structural Role: Key evidence/problem identification that supports the author's conclusion
Predicted Answer Patterns: "provides evidence against a strategy" or "identifies a problem with the described approach"

Answer Choices Explained

The first is an assumption that forms the basis for a course of action that the argument criticizes; the second presents the course of action endorsed by the argument.

'The first is an assumption that forms the basis for a course of action that the argument criticizes' - ✗ WRONG - Boldface 1 is not an assumption but rather an explanation of why companies behave a certain way. It describes observable business realities rather than unstated premises.
'the second presents the course of action endorsed by the argument' - ✗ WRONG - Boldface 2 doesn't present a course of action at all. It identifies a problem with maximum pricing rather than recommending what to do.

The first is a consideration raised to explain the appeal of a certain strategy; the second is a consideration raised to call into question the wisdom of adopting that strategy.

'The first is a consideration raised to explain the appeal of a certain strategy' - ✓ CORRECT - Boldface 1 explains why maximum pricing appeals to companies: technological advantages are temporary and they want to maximize profits quickly.
'the second is a consideration raised to call into question the wisdom of adopting that strategy' - ✓ CORRECT - Boldface 2 reveals the flaw in maximum pricing by showing it accelerates competitive response.

The first is an assumption that has been used to justify a certain strategy; the second is a consideration that is used to cast doubt on that assumption.

'The first is an assumption that has been used to justify a certain strategy' - ✗ WRONG - Again, boldface 1 is not an assumption but an explanation of business behavior. It's describing what companies observe and think, not making unstated premises.
'the second is a consideration that is used to cast doubt on that assumption' - ✗ WRONG - Since the first isn't an assumption, the second can't be casting doubt on an assumption. Plus, boldface 2 doesn't challenge boldface 1's truth.

The first is a consideration raised in support of a strategy the argument endorses; the second presents grounds in support of that consideration.

'The first is a consideration raised in support of a strategy the argument endorses' - ✗ WRONG - The argument endorses moderate pricing, not maximum pricing. Boldface 1 explains maximum pricing, which the argument ultimately rejects.
'the second presents grounds in support of that consideration' - ✗ WRONG - Boldface 2 actually works against maximum pricing by showing its negative consequence.

The first is a consideration raised to show that adopting a certain strategy is unlikely to achieve the intended effect; the second is presented to explain the appeal of that strategy.

'The first is a consideration raised to show that adopting a certain strategy is unlikely to achieve the intended effect' - ✗ WRONG - Boldface 1 doesn't show that maximum pricing fails to achieve its intended effect. It explains why companies pursue maximum pricing.
'the second is presented to explain the appeal of that strategy' - ✗ WRONG - Boldface 2 shows the problem with maximum pricing, not its appeal. This reverses the roles of the two boldface statements.

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