Logical Reasoning

PT140 · S2 · Q7 If grain prices double

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If grain prices double then the average price of a loaf of bread will rise between 10 and 15 percent, whereas the price of grain-fed beef will come close to doubling.

Given that ...

A doubling in the price of grain will only cause the average price of break to rise 10-15%

Why is it that ...

A doubling in the price of grain will cause the price of grain-fed beef to double?

Evaluate

We really could have framed this paradox either way, switching these two ingredients. We're really just trying to explain why a doubling in the price of grain would have a smaller effect on the price of bread than it would on the price of grain-fed beef.

Generally speaking, if you make a certain product, you have a lot of different expenses that go into setting your price. If one of those expenses (such as grain) were to rise by 30%, it wouldn't necessarily make the price of your product go up by 30%, because grain might be a very part of the expense to make your product.

For example, if strawberries rose in price, it might only modestly affect the price of a mixed berry yogurt, because there are other fruits in there as well, whereas it might more drastically affect the price of strawberry yogurt.

Goal

Look for an answer saying that grain is a more important ingredient / bigger category of expense when it comes to grain-fed beef than when it comes to a loaf of bread.

Which one of the following would, if true, most contribute to an explanation of the phenomenon described above?

Farmers engaged in very large-scale
No Distinction
An answer will be worthless to us if it doesn't provide a distinction between bread and beef, when it comes to use of grain. This answer only talks about beef.
1% picked this
The wholesale price per pound
No Impact
This tells us how the price of beef and bread compare in relative terms, but it doesn't speak to how one uses grain differently from the other. We're not concerned with which product has the higher starting price. We're concerned with why a spike in grain prices affects one price more than the other price.
11% picked this
Correct
The labor and marketing costs
Why this is right
This provides the distinction we were looking for, where we learn that grain is a more important ingredient / bigger expense category when it comes to beef than when it comes to bread. If a bread company is selling loaves for $3, their expenses for that loaf of bread are less than $3 (otherwise they wouldn't make any profit). Suppose their expense breakdown is like this: $0.30 - grain $0.20 - yeast $0.20 - sugar $0.30 - eggs $1.50 - labor / marketing $2.50 - total expenses If grain doubles, it'll mean that the grain part now costs 60 cents. So now the total expense will be $2.80. The bread maker might need to raise the price of bread to like $3.30 to still make the same profit. That was a 10% increase in price. Meanwhile, for beef, let's say a certain quantity of beef costs $3 and the expense breakdown is as follows: $2.00 - grain $0.25 - labor / marketing $0.25 - distribution $2.50 - total expenses If the cost of grain doubles, it will now be $4, and so the total expenses will be $4.50 per unit of beef. That means the cost of beef will now need to be like $5 per unit to make the same profit. The price came close to doubling.
Skill tested: Paradox · how this choice captures the argument's function is the move to repeat next time.
82% picked this
Only an insignificantly small proportion
No Distinction
An answer will be worthless to us if it doesn't provide a distinction between bread and beef, when it comes to use of grain. This answer only talks about beef.
4% picked this
The vast majority of retail
Unclear Impact
This provides some distinction between bread and beef, but the distinction is that bread is bought from smaller bakers and meat is bought from larger operations. How does the size of the supplier explain why the rising price of grain would affect one product more than the other? If anything, we'd expect a larger supplier to have a bigger cushion for absorbing expenses (the bigger the scale of your business, the better you can withstand declining margins for a given product). So if we tried to read too much into this, it would seem to go the opposite direction of what we're trying to explain, because we would think that beef (coming from a larger operation) would be more resistant to changes in price. But it's too strained a connection no matter what to think that the size of the company that bread or beef is purchased from will explain such a drastic difference in terms of how much a doubling in the price of grain will affect the price of the product.
2% picked this

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