When the products of several competing suppliers are perceived by consumers to be essentially the same, classical economics predicts that...

GMAT Critical Reasoning : (CR) Questions

Source: Official Guide

Critical Reasoning

Logically Completes

MEDIUM

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When the products of several competing suppliers are perceived by consumers to be essentially the same, classical economics predicts that price competition will reduce prices to the same minimal levels and all suppliers' profits to the same minimal levels. Therefore, if classical economics is true, and given suppliers' desire to make as much profit as possible, it should be expected that

Which of the following best completes the passage below?

in a crowded market widely differing prices will be charged for products that are essentially the same as each other

as a market becomes less crowded as suppliers leave, the profits of the remaining suppliers will tend to decrease

each supplier in a crowded market will try to convince consumers that its product differs significantly from its competitors' products

when consumers are unable to distinguish the products in a crowded market, consumers will judge that the higher-priced products are of higher quality

suppliers in crowded markets will have more incentive to reduce prices and thus increase sales than to introduce innovations that would distinguish their product from their competitors' products

Solution

Passage Analysis:

Text from Passage	Analysis
When the products of several competing suppliers are perceived by consumers to be essentially the same, classical economics predicts that price competition will reduce prices to the same minimal levels and all suppliers' profits to the same minimal levels.	What it says: When consumers see products as basically identical, economic theory says competition will drive both prices and profits down to rock-bottom levels for everyone What it does: Sets up the economic principle that will be the foundation for whatever comes next What it is: Economic theory/principle Visualization: Company A, B, C all selling similar phones → prices drop from $500 to $300 → profits drop from $200 to $50 per phone
Therefore, if classical economics is true, and given suppliers' desire to make as much profit as possible, it should be expected that	What it says: Since this economic theory exists and companies want maximum profits, we should expect something logical to follow What it does: Links the economic principle to real business behavior and sets up an expectation What it is: Author's logical transition leading to a conclusion

Argument Flow:

The passage starts with an economic principle about what happens when products seem identical to consumers, then uses that principle plus the reality of profit-seeking behavior to set up an expectation about what companies should logically do

Main Conclusion:

The passage is incomplete - it's building toward a conclusion about what suppliers should be expected to do, but we need the answer choices to complete the thought

Logical Structure:

This follows a conditional logical structure: IF economic theory is true AND companies want profits, THEN we should expect [something]. The premises establish both conditions, leading to a logical expectation that needs to be completed

Prethinking:

Question type:

Logically Completes - We need to find what logically follows from the economic principle and suppliers' profit-maximizing behavior

Precision of Claims

The passage establishes a conditional relationship: when products are perceived as identical, classical economics predicts price and profit reduction to minimal levels for all competitors

Strategy

Since classical economics says identical products lead to minimal profits for everyone, and suppliers want maximum profits, we should expect suppliers to try to avoid this situation. They would logically try to differentiate their products or avoid direct price competition to escape the 'race to the bottom' scenario

Answer Choices Explained

in a crowded market widely differing prices will be charged for products that are essentially the same as each other

This contradicts the economic principle stated in the passage. If classical economics is true, we should expect similar products to have similar prices due to competition, not widely differing prices. This choice goes against the foundational premise that price competition reduces prices to the same minimal levels.

as a market becomes less crowded as suppliers leave, the profits of the remaining suppliers will tend to decrease

This misunderstands the relationship between market crowding and profits. The passage suggests that when markets are crowded with similar products, profits are minimal. If suppliers leave and the market becomes less crowded, remaining suppliers should actually see their profits increase, not decrease, due to reduced competition.

each supplier in a crowded market will try to convince consumers that its product differs significantly from its competitors' products

This is the logical conclusion that flows perfectly from the premises. Since identical products lead to minimal profits for everyone, and suppliers want maximum profits, they would naturally try to convince consumers that their products are different. By creating perceived differentiation, suppliers can escape the price competition that drives profits down to minimal levels.

when consumers are unable to distinguish the products in a crowded market, consumers will judge that the higher-priced products are of higher quality

This focuses on consumer behavior regarding price-quality perception, which is not what the argument is building toward. The passage is about what suppliers should be expected to do given the economic principle and their profit motivations, not about how consumers judge quality.

suppliers in crowded markets will have more incentive to reduce prices and thus increase sales than to introduce innovations that would distinguish their product from their competitors' products

This suggests suppliers would focus on price reduction rather than innovation, but this contradicts the logical flow. If price competition leads to minimal profits, profit-maximizing suppliers would want to avoid price competition through innovation and differentiation, not embrace it further.

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