#25 - Credit card companies justify charging cardholders

[nusheenaparvizi]

Hi,

When I first answered this question I chose answer choice D. I saw this as the best choice because in the stimulus it mentions "Without late fees, the companies argue, they would have to spread the cost of the risk over all cardholders." The important part I grasped from that is that the companies would not be paying the cost, but that they would be administering a higher fee/cost to their customers/cardholders. Answer choice D is saying that "Libraries should charge high fines for overdue books, since if they did not do so some people would keep books out indefinitely, risking inconvenience to other library users who might want to use the books," which I thought was following the same form of reasoning as the stimulus as they would be charging the fine to the person with an overdue book because it would be an inconvenience (just as in the stimulus charging the late fee to all cardholders) to those who may want the book.

Why is answer choice B the better answer if it states that "...thus [insurance companies] are more likely to require the companies to pay out money in claims," if it falls on the responsibility of the insurance company and not all sports car drivers like the stimulus reasons?


Thanks!
Nusheena

[nusheenaparvizi]

Bumping this incase no one has seen it yet- Thank you so much!

[Christen Hammock]

Hi Nusheena!

You're right that the broad principle that can be drawn from the stimulus is that credit card companies justify individual late fees for select few individuals to avoid passing the cost along to everybody. As the answer choices demonstrate, though, the principle is a little bit more specific than that.

In Answer Choice (B), insurance companies are operating the same way as credit card companies. Because their numbers tell them that sports car drivers (like late payers) are riskier, they go ahead and front load that risk by targeting sports car drivers and late payers.

Answer Choice (D) doesn't quite follow this line of reasoning. The principle in (D) is that if the risk of getting caught is low, the fine must be very high to make up for how few people get caught. There's no extra risk that the few who get caught entail.

Answer Choice (C), about libraries, is about incentivizing people to act a certain way—--not about sharing the cost of the few people who will keep books out too long. In (C), the libraries try to prevent people from keeping books out too long in the first place.

[nusheenaparvizi]

Thank you so much for clarifying!

[sbose]

Hi!

I was torn between B and C for this question and ended up guessing B but am not entirely sure why C is incorrect. I thought C might be the answer since it mentioned that overdue books would inconvenience others, similar to how late-paying cardholders expose other people to financial risk.

Thank you for your help!

[Rachael Wilkenfeld]

Hi sbose,

The key principle in the stimulus was that the companies should charge late cardholders more because they are higher risk of financial cost. Answer choice (C) doesn't have that fees should be charged to those who risk financial cost. Answer choice (C) is about inconveniencing others, not risking financial payouts. It doesn't talk about how late returns are more likely to damage the books, causing higher costs for everyone. Answer choice (B) however, is about risky behavior that risks higher costs, just like in the stimulus.

Hope that helps!