#20 - Economist: When national governments dispense funds to local governments

[Administrator]

Complete Question Explanation

Parallel Reasoning. The correct answer choice is (C).

Answer choice (A):

Answer choice (B):

Answer choice (C): This is the correct answer choice.

Answer choice (D):

Answer choice (E):

This explanation is still in progress. Please post any questions below!

[samroman97]

Yea I was stuck between C and D on this one.
Is D incorrect because they spent the "same amount of food as they would have"?
I see how C is similar to the stimulus by stating that "result profits were lower" (stimulus says "taxes were higher", but I saw lower and higher and thought to myself, "Well that is not completely parallel."

Sam

[Jeff Wren]

Hi Sam,

You're correct to notice the difference in wording between D (same amount of food) and C (profits that were lower).

Let's zoom out and examine what's going on in the stimulus and these answers and why that difference in wording is so important.

In the stimulus, the government's funding policy creates an (arguably bad) incentive for the local governments. Basically, the more local projects that the local governments create, the more funding that they get, so this causes the local governments to create more projects than they normally would need (perhaps even projects that aren't really necessary), which in turn raises the total amount of government funding and taxation than would otherwise be needed if the local governments didn't have this incentive.

Answer C follows this same situation, in which the sales manager's policy of offering a prize to the salesperson who sells the most products creates a bad incentive which causes the salespeople to reduce the prices in order to try to win the prize, which results in lower profits than they'd have otherwise. In other words, the incentive of awarding the prize had the opposite effect of what it was intended to do. (It was meant to encourage the salespeople to sell more and thereby increase profits, but it backfired by actually reducing profits.)

Answer D on the other hand, doesn't have this negative incentive that causes a bad outcome. In D, the people pool their money to buy food more cheaply (which is a benefit). Even though they end up buying more food total and therefore end up spending the same amount on food, they are getting more food for the same money, so this is still a win. (Notice there's nothing mentioned here about buying more food than they need, or wasting the extra food, etc..) Unlike the stimulus and Answer C, there's no bad incentive here that causes one group to act irresponsibly/unethically while competing against other groups.

[aziragoramo]

I'm confused to as when it's okay to have different directions in parallel questions. By directions I mean for example increase, decrease, etc. Here we consider increased gov't spending and tax bad so profits lower is okay? I always have to think about how many verities are warranted with this type of parallel question.

[Luke Haqq]

Hi aziragoramo!

As a general rule, directionality in the sense you mention doesn't necessarily have to be paralleled for an answer to be correct.

Here, the reasoning of the stimulus in more abstract terms can be summarized as: When governments do X (dispense funds to local governments), everyone does Y (try to compete with others for a greater share), with the (negative) result of Z (overall government spending is higher). This parallels the reasoning in (C): When managers do X (offer prizes for most sales), everyone does Y (try to compete with each other), with the (negative) result of Z (profits are lower than they otherwise would be).

Rather than directionality in that sense, one thing that's important to be aware of is any conditional reasoning. It's also important to make note of any quantifier terms like some, all, and most. A correct answer choice will parallel how these terms are used in the premises and conclusion.