PT10.S4.Q24 - Rate of inflation and Rate of Return.

laurenandersonlaynelaurenandersonlayne Member
edited December 2020 in Logical Reasoning 16 karma

Hello!

This questions is LR and QS ends in "logically completes the argument" making it a MSS or MC question (I believe MSS but I could be wrong about that.

"Rate of inflation and Rate of Return."

If anyone has a good understanding of the question and the answer choices, I am very lost as to how to get to the correct answer.

Thank you!

Comments

  • canihazJDcanihazJD Alum Member Sage ⭐
    8449 karma

    7sage classified this as a MSS, though I would think it's a MBT.

    • Inflation exceeds the rate of return on the most profitable investment
    • Difference between inflation rate and return on most profitable investment is the minimum percentage the value of any investment will decline
    • A particular investment declines more than that percentage.

    Say your most profitable investment has a return of 10% and inflation is 11%, so any given investment will decline a minimum 1% in value.

    Now we have a particular investment declines by more than 1% in value... say 2%.

    It must be true that:

    A. inflation has risen - no, it could be stable or have even decreased. We just know that a particular investment has declined more than the minimum percentage of decline in value.

    B. our particular investment is becoming less profitable - we don't know the particular investment's profitability in relationship to a past point in time. We know it has declined in value at a rate greater than the minimum. We are only looking at a specific point in time.

    C. our particular investment is less profitable than the most profitable available - this must be true. Because we know the rate of return of the most profitable investment is greater than that of the particular investment, the latter must be less profitable, regardless of how profitable they are because of the relationship to each other - our most profitable is at 10% incurring the minumum 1% loss, so our other investment cannot be our most profitable, as it is declining by more than the minimum.

    D. rate of return on most profitable investment declined - again, we don't know what the relationship to past returns is. It could also be rising or stable.

    E. there has been an change in which investment is the most profitable - this does not have to be true, and makes no difference either way.

    Basically all the wrong answers deal with a comparison between what was and what is now, but all we can support is what must be true at this specific point in time.

  • Ashley2018-1Ashley2018-1 Alum Member
    2249 karma

    Sorry if this a dumb question, but the rate at which the investment declines in value is tied to its profitability right? I know nothing about econ so this question was awful for me.

  • canihazJDcanihazJD Alum Member Sage ⭐
    edited December 2020 8449 karma

    @"ashley.tien" said:
    Sorry if this a dumb question, but the rate at which the investment declines in value is tied to its profitability right? I know nothing about econ so this question was awful for me.

    Yes, with regard to an individual investment. That is the draw of B. But for our question we don't know that it necessitates a decline in profitability. It could be declining in value with profit steady or rising. Value is tied to profitability but value ≠ profitability.

    Profitability works in C because we are comparing two investments that we've established a relationship between with regard to relative profitability.

  • laurenandersonlaynelaurenandersonlayne Member
    16 karma

    @canihazJD Thank you for that explanation!! Sorry I am just now seeing this

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