Q9 - Complaints that milk bottlers

[soyeonjeon]

Can we please go over this problem?

I find the stimulus a bit difficult to break down into a good logical structure. I got this wrong and am wrondering what approach is the best method for solving this problem.

thanks,
best wishes

[zee.brad]

My thought flow...
milk bottler (MB)
raw milk (RM)
bottled milk (BM),
so, basically the statement is saying:
BM price rises and RM price rises --> MB smallest % of the BM price
BM price rises and RM price falls --> MB greatest % of the BM price
answer choice:
A. no matter RM price rises/falls, you have no idea how much you pay for the BM
B. so out of scope, it didn't mention farmers' costs at all
C. we don't know the case when BM price is low/high, we only know when BM price rises
E. we don't know when consumers tend to complain more, we simply know consumers complaints...
The correct answer D:
Okay, so we know that, BM price can rise even RM price falls, so, MB generally do not respond to a decrease in RM price by lowering the BM price.

[Nina]

The correct answer D:
Okay, so we know that, BM price can rise even RM price falls, so, MB generally do not respond to a decrease in RM price by lowering the BM price.

i still can't see why D is the correct answer. especially, how do we know that BM price can rise even RM price falls? i think we only know that when RM price is falling, the markups are greatest proportionate to the retail price.

any help will be appreciated!

[cyt5015]

The correct answer D:
Okay, so we know that, BM price can rise even RM price falls, so, MB generally do not respond to a decrease in RM price by lowering the BM price.

i still can't see why D is the correct answer. especially, how do we know that BM price can rise even RM price falls? i think we only know that when RM price is falling, the markups are greatest proportionate to the retail price.

any help will be appreciated!

Nina, pay close attention to the last two sentences. Suppose that the milk bottlers Do respond to a raw-milk price decrease by proportionately lowering the retail price, let's say before decrease, the retail price is $10, raw-milk $8 (80% retail price), bottle markup will be $2 (20% of retail price); after decrease, raw-milk is $4 (half lower), proportionally, we get retail price of $5 and bottle markup of $1. The markup proportion to the retail price is still 20% same to the original percentage. Actually, no matter what retail/raw milk ratio you use, the bottle markup will be always the same proportion amount as the original setup. This result is conflict with the stimulus "when the raw-milk price is falling, the markups are greatest proportionate to the retail price; Similarly, you can reach the same conclusion when raw milk price is increasing.

[ohthatpatrick]

Since we've had some good conditional and mathematical explanations for this Inference question, let me try to offer a more conversational one for the sake of anyone who doesn't like the former options.

I think the easiest to understand metaphor for this whole stimulus is gas prices.

When gas prices get super high, like $4/gallon, people start grumbling about gas companies charging too much for the sake of huge profits.

This stimulus is saying, "ACTUALLY, when gas gets really pricey, the gas companies are making less profit. What's happening is that the gas companies are paying more for their raw supply, and since they want you to still buy their gas, they don't mark up the price too much."

Meanwhile, when gas is low, like $3/gallon, people don't grumble. Yet, the stimulus says, "THIS is actually when gas companies are making more profit. They're paying way less for their supply; they could probably charge $2.50/gallon and still make the same profit they make when gas is forced to be $4/gallon. But instead of charging $2.50 and keeping the same profit margin, they jack it up to $3/gallon to make more profits, knowing we won't care."

So the key relationship is that when supply prices are high, profit margins are lower.

When supply prices are low, profit margins are higher.

In regards to (D), if gas companies always kept the same profit margin, then it wouldn't make any difference whether supply prices were high or low, they would adjust their prices accordingly to make the same profit margin.

Since we know they DON'T have the same profit margin when prices are high that they do when prices are low, we know that they DON'T straightaway adjust their prices proportionately when supply prices change.

=== other answers ===

(A) goes against the gist of what we're hearing. We pay more for milk when the supply price is rising. The milk company adds on LESS mark-up, but we're still paying more then when the supply price is lower.

(B) The higher supply prices are passed on, somewhat. The milk company absorbs some of the rising price by adding on a smaller mark-up, but the milk company doesn't fully shoulder the burden of the higher prices.

(Note: in reality, (A) and (B) are just not things we can infer ... I'm pretending we know the common sense truth that would actually contradict these answer, since I think that will 'click' more for people)

(C) This actually sounds close to the gist of the paragraph, but the "extended period" aspect of the answer is out of scope. There's also some extreme language with "substantially" greater, which we can't support.

(E) The only relationship we could draw between consumer complaints and profits would be between consumer complaints and the profits of milk bottlers, NOT dairy farmers. We don't know nearly enough about dairy farmers' revenue/expenses to know anything about their profits when the price of raw milk goes up.

Hope this helps.

[Mab6q]

Hey Patrick, I know it's been a long time since you wrote your explanation, but I have a question about why C and E are wrong.

For C and E, I didn't focus on the extended period of time or the dairy farmers, respectively. For C, I saw the issue as concerning the price of the bottled milk. It talks about the markups being greatest when the price of bottled milk is lowest , but that's not what the stimulus says. It actually says that markups are greatest when the price of raw milk is the lowest. So even though raw milk prices are low, the markups increase, so the price of the bottled milk might not change from when raw milk prices are high, because as I said, the markups adjust to the rate.

Likewise for E, even though the issue of dairy farmers is glaring, we can't make any inferences about profits. When they complain more, that means markups are lower, which means the milk bottlers are paying more for the price of raw milk. However, the markups adjust to the price raw milk (raw milk increases, markups decrease) so the actual price of the bottled milk should not change.

I hope you were able to follow my logic on that one. Does it make sense??

No question D is the right answer btw.

[ohthatpatrick]

I think I followed your thinking.

For (E), we could definitely also attack the idea of 'profits'. I just went with the low-hanging fruit of dairy farmers, who are completely out of scope.

We have at least SOME sense of milk bottlers' profit, but only insofar as we know about the cost of raw milk and some relative idea of selling price. Although this gives us SOME idea about the bottlers' expenses and revenue, there could be other aspects of expense and revenue that we don't know about.

But I think there is one thing you might be missing from the stimulus that affects how you're thinking about (C) and (E).

It's not allowing us to believe that milk stays a constant price.

You seem to be thinking that milk is always $4, for example. When raw milk costs $3, the markup is $1. When raw milk goes up to $3.50, the markup is $.50.

You might not be thinking the price of milk MUST be constant, but you seem to be thinking it could be.

I think they ruled that out, though, when they said "the complaints occur when the bottled-milk price rises".

They seem to be giving us a world in which, when raw milk would go up to $3.50, the price of bottled milk would go up to something like $4.25. (only a $.75 markup, not as big as the usual $1 markup when raw milk only costs $3)

So you're definitely correct in thinking that part of what makes (C) crappy is that it relates the size of the markup to the price of BOTTLED, rather than RAW, milk.

But the gist of the information still connects the idea that when the price of raw milk goes up, the price of bottled milk goes up as well. If it didn't, consumers wouldn't start complaining.

So if (C) were more moderately worded, like "Milk bottlers take greater markups on bottled milk when its price is lower than when it is higher", we would definitely have some support.

[Mab6q]

I think I followed your thinking.

For (E), we could definitely also attack the idea of 'profits'. I just went with the low-hanging fruit of dairy farmers, who are completely out of scope.

We have at least SOME sense of milk bottlers' profit, but only insofar as we know about the cost of raw milk and some relative idea of selling price. Although this gives us SOME idea about the bottlers' expenses and revenue, there could be other aspects of expense and revenue that we don't know about.

But I think there is one thing you might be missing from the stimulus that affects how you're thinking about (C) and (E).

It's not allowing us to believe that milk stays a constant price.

You seem to be thinking that milk is always $4, for example. When raw milk costs $3, the markup is $1. When raw milk goes up to $3.50, the markup is $.50.

You might not be thinking the price of milk MUST be constant, but you seem to be thinking it could be.

I think they ruled that out, though, when they said "the complaints occur when the bottled-milk price rises".

They seem to be giving us a world in which, when raw milk would go up to $3.50, the price of bottled milk would go up to something like $4.25. (only a $.75 markup, not as big as the usual $1 markup when raw milk only costs $3)

So you're definitely correct in thinking that part of what makes (C) crappy is that it relates the size of the markup to the price of BOTTLED, rather than RAW, milk.

But the gist of the information still connects the idea that when the price of raw milk goes up, the price of bottled milk goes up as well. If it didn't, consumers wouldn't start complaining.

So if (C) were more moderately worded, like "Milk bottlers take greater markups on bottled milk when its price is lower than when it is higher", we would definitely have some support.

I see how how we can infer something about profits from that, thanks!.

[YufeiR103]

Hi, I think a great way to prove D is correct is by assuming contradictions.

Assume the Milk bottlers respond to a decrease in raw-milk prices by proportionately lowering the price of the milk, then if raw milk price decreases from 20 to 10 , which is 50%, the bottlers' milk should decrease from 40 (markup of 20) to 20 (markup of 10), which is also 50%.

However, according to the statement, we know that when then raw milk price is falling, the markups are greatest, which is apparently not the case, since the markup decreased from 20 to 10, which is also proportionate to the decease of price of raw-milk.

Hence, it is clear that there is a contradiction, and so D is correct.

Hope this makes sense!