Logical Reasoning

PT139 · S4 · Q19 Professor: Economists argue

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Professor: Economists argue that buying lottery tickets is an unwise use of resources, because the average payoff for the tickets sold in a lottery is much lower than the cost of a ticket.

Conclusion

It's faulty to reason that lotto tickets are a poor use of money, just because the average payout for a ticket in a lottery is much lower than the cost of a ticket.

Evidence

Nobody would say that individual insurance policies are a poor use of money, and they also have an average payout that's less than the amount paid by the policy.

Evaluate

The easy part of this argument is that it's making a Comparison between lotto tickets and insurance policies, so if we're going to Weaken this Comparison, we're probably going to want an answer that points out an important difference between the two things.

The hard part of this argument is understanding the whole "average payout" concept.

We can remind ourselves that running a lotto and running an insurance company are both profitable ventures. They take in more money than they give out.

Lotto's might collect 10 million in revenue and then pay out 1 million as the grand prize.

Insurance companies might collect 10 million in premiums and then pay out 1 million to people who file claims when their property is damaged.

Since the average payout of the lotto or an insurance policy would be calculated by thinking of how much money is paid in vs. how much money ever goes back to the customers, any profitable lotto or insurance company will have a smaller amount going back to customers than is being taken in.

Put another way, it might cost $5 to buy a lotto card, but the average return on buying one is $2.

An insurance policy might cost $500 and the average payout to policy holders is $75.

Goal

In both cases, we know that we're putting money into a system that in the long run is meant to collect more money than will be distributed. (gamblers in Vegas know that "the House always wins", meaning, in the long run the casinos must take in more money than they give away)

So how can we fight this conclusion and argue that

19.

Which one of the following, if true, most weakens the professor's argument?

  1. Individuals spend, on average, much

    Strengthens, if Anything

    If we're trying to argue that "insurance makes sense, lotto tickets don't", it certainly doesn't feel superficially helpful to hear "ya spend even more on insurance than lotto". This is a difference, but not a meaningful one. As stated in my example before, the average cost of an insurance policy might be $500 (vs. a $5 lotto ticket), but the average payout of the insurance policy is also much more, $75 vs. $2. All we know is that they are both a "losing bet" in the long run. We aren't told which one has a worse rate of losing money, but we would only care about the ratio of pay-in to pay-out (500/75 vs. 5/2). This answer is only saying that one has a bigger pay-in than the other (but if it also has a bigger average pay-out, it could still be the wiser investment).

    3% picked this

  2. Insurance companies generally retain a

    Strengthens, if Anything

    This is essentially saying that insurance companies have a higher profit margin than do lotto sponsors. In other words, with insurance companies, they're keeping more of the money and expending less on payouts to their customers. That would make them a bigger losing bet than lotto tickets, so that goes the opposite of our desired direction: "insurance is fine, lotto is dumb".

    3% picked this

  3. Taking small financial risks can

    Strengthens

    "Small financial risks for the chance of obtaining much larger benefits" sounds a lot like lotto tickets. This answer is saying something good about lotto tickets? No thanks.

    4% picked this

  4. In general, the odds of

    Term Shift: grand prize

    This is definitely the most tempting answer, because it feels like it points to a salient difference that makes lotto tickets sound worse: you're way less likely to get a payout! Having reached answer choice D without having made any friends along the way, this is definitely an answer I would hold. The problem is, this answer is talking about the grand prize. The professor's argument is about the average payout. If this answer said the odds of winning any prize in lotto are way lower than the odds of getting an insurance settlement, that would be a meaningful difference that would disrupt the professor's analogy and I'd be much more inclined to pick it. But as written, this just establishes that you're less like to win the biggest prize than to get an insurance settlement. It's still possible, in this case, that the odds of winning something meaningful are as good as the odds of getting some insurance settlement, so it doesn't have a particularly strong impact on the argument.

    38% picked this

  5. Correct

    The protection against loss that

    Why this is right

    This gets at a meaningful difference that allows us to argue that insurance is good, lotto is dumb. Insurance is important because it can help you avoid catastrophic economic losses that could ruin your life and hurdle you into bankruptcy. Lotto is a luxury that might give you a more comfortable standard of living, but in almost all cases will just lead to you losing your money. This has a stronger impact on the argument than our other contender, D, because D is too narrowly focused on the grand prize, not lotto payouts in general.

    Skill tested: Weaken · how this choice captures the argument's function is the move to repeat next time.

    52% picked this

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