Loading...
Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate. Assume that installation costs for FD are insignificant if the customer already has SD service.
Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?
| Text from Passage | Analysis |
| Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. |
|
| FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. |
|
| Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate. |
|
| Assume that installation costs for FD are insignificant if the customer already has SD service. |
|
The argument starts by describing Clearbell's two-tier service model, then reveals a counterintuitive fact about costs, presents a puzzling business scenario, and finally eliminates one potential explanation. We move from basic setup to a business paradox that needs resolving.
Clearbell's profits would decrease if they gave all customers the cheaper-to-provide FD service at the current low-fee rate, despite FD being more efficient to operate.
This isn't a traditional argument with premises supporting a conclusion. Instead, it's a business puzzle where we have facts (FD costs less to provide but is priced higher) leading to a counterintuitive result (profits drop when everyone gets the efficient service cheaply). The question asks us to explain this apparent contradiction.
Paradox - We need to explain why giving everyone the cheaper-to-provide FD service at the low price would actually hurt profits, even though FD costs less per call to operate
The key claims are about cost efficiency (FD costs substantially less per call), pricing structure (SD has low fee, FD has higher fee), and profit impact (profits would drop if everyone got FD at low-fee rate)
For paradox questions, we need to find explanations that reconcile the seemingly contradictory facts. Here we have FD being cheaper to operate but somehow unprofitable if offered to everyone at the low price. We should look for factors beyond per-call costs that could explain this profit drop - things like usage patterns, customer behavior changes, or revenue structure differences
This choice explains the paradox perfectly. It tells us that FD customers paying higher fees generate substantial extra revenue that more than compensates for the extra costs of serving SD customers at low fees. Currently, profitable FD customers are essentially subsidizing less profitable SD customers. If everyone moved to FD at the low-fee rate, this cross-subsidy would disappear - Clearbell would lose all that extra revenue from high-paying customers while still dealing with overall operational costs. This explains why profits would drop despite FD being cheaper per call.
Information about fee increases in the past doesn't help explain why giving everyone FD service at the current low rate would hurt profits. Whether fees were raised last year or not doesn't address the fundamental business model issue we're trying to understand. This is irrelevant historical data that doesn't resolve the paradox.
This choice actually makes the paradox worse rather than explaining it. If 96% of customers think FD is better but fewer than 10% choose it due to price, this suggests that if FD were offered at the low rate, almost everyone would switch to it. But this doesn't explain why that switch would hurt profits when FD costs less to provide. This choice identifies customer preference patterns but doesn't resolve the profit puzzle.
What competitors do with their pricing doesn't explain Clearbell's internal profit calculations. Even if competitors offer FD cheaply to business customers, this doesn't tell us anything about why Clearbell's specific cost and revenue structure would make offering FD at low rates unprofitable. This is about external market conditions, not internal business dynamics.
Historical profit trends after FD was introduced don't explain the specific scenario of offering FD to all customers at the low rate. The pattern described (profits up then down) might reflect various market factors, but it doesn't address why the accountants calculated that universal low-cost FD would hurt profits. This is descriptive data without explanatory power for our specific situation.