Logical Reasoning

PT8 · S1 · Q9 Complaints that milk bottlers take

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Complaints that milk bottlers take enormous markups on the bottled milk sold to consumers are most likely to arise when least warranted by the actual spread between the price that bottlers pay for raw milk and the price at which they sell bottled milk.

Facts

most claims Complains about the profiteering of milk bottlers are most likely to arise when milk bottlers have their lowest profit margin!

Complaints arise mostly when the price is rising.

conditionals price is rising → profit margins are slimmer price is falling → profit margins are bigger

Evaluate

The #1 thing we read for on MBT is conditional language, and then otherwise we look for Causal / Mathy / Pivot / Comparison ideas. It does seem like the last two claims are giving us some conditional rules, but we're also getting some comparative math facts.

When we combine the final two conditionals with the overlapping fact that complaints most likely arise when price is rising, we basically derive the first sentence:

complaints most likely arise when profit margins are slimmer.

They stole our conditional logic inference! Well, what other ideas could we derive? Maybe something with the math-y comparisons?

Some students are confused by some of the terms in this stimulus. You're probably familiar with this equation: Profit = Revenue - Expenses

"Profit" can also be called "a markup", or .

All those mean the same thing. You can express profit in absolute terms or relative terms. If we bought a vinyl record for $10 but sold it for $12, we could say that we made a $2 profit or had a 20% markup.

This question is talking about profit/markup in those relative terms, not absolute terms.

If the bottlers pay $2 per bottle and sell it for $3 per bottle, that extra $1 of profit represents a 50% markup. (1/2 = 50%)

If the bottlers pay $4 per bottle and sell it for $5 per bottle, that extra $1 of profit represents a 25% markup. (1/4 = 25%)

So when prices are falling, the % markup is bigger than when prices are rising. The % markup is known as "the profit margin".

Goal

Since the first sentence already stole the inference we can make by combining the final three sentences, the correct answer will probably have to do with these Math-y comparisons.

9.

If all of the statements above are true, which one of the following must also be true on the basis of them?

  1. Consumers pay more for bottled

    Unsupported

    It goes against common sense that you'd pay more for gas at the pump when barrels of gas are cheaper than usual for the gas company to buy. That's what this is saying. We know that profit margin is bigger when the raw-milk price is falling, but that doesn't mean the actual price is higher. When raw-milk costs $2 and is sold for $3, the profit margin is 50%. When raw-milk costs $3 and is sold for $4, the profit margin is 33%. When raw-milk costs $4 and is sold for $5, the profit margin is 25%. If the price of raw-milk falls from $3 to $2, consumers aren't paying more. Their price went from $4 to $3. The only thing that increased was the bottlers profit margin, which went from 33% to 50%.

    18% picked this

  2. Increases in dairy farmers’ cost

    Contradicted

    We don't know this to be true. Let's say that when raw-milk costs $2, it's sold for $3. The cost was $2, the markup was $1. Now say the cost of raw-milk increases to $2.50. If the bottler keeps the price at $3, then the bottler did not pass the increased cost onto the customers. The bottler is absorbing that cost and letting it eat away at profits. The bottler is now making a 50 cent profit, instead of a $1 profit. If the bottler still wants to make $1 of profit, then they will pass that cost onto the customer and charge $3.50 per bottle. Either way, it fits the facts of this stimulus. Either way, whether they pass on the cost or not, when the cost is rising, the markup is a smaller proportion of the price. original: $2 cost, $3 price, 50% markup ($1 / $2 = 1/2 = 50%) don't pass cost: $2.50 cost, $3 price, 20% markup ($0.50 / $2.50 = 1/5 = 20%) do pass cost: $2.50 cost, $3.50 price, 40% markup ($1 / $2.50 = 2/5 = 40%)

    4% picked this

  3. Milk bottlers take substantially greater

    Unsupported

    The stimulus tells us about markups when the raw-milk price is rising or falling, not about extended periods of high or low retail price. We don't know how to judge stagnant high retail prices vs. stagnant low retail prices.

    12% picked this

  4. Correct

    Milk bottlers generally do not

    Why this is right

    This is another way of saying, "when the cost of raw-milk is falling, the profit margin is greatest." For a markup to grow while cost is dropping, retail price must not be dropping proportionally with cost. Here's an example where the cost drops by 50%. If the price also drops by 50%, then the markup will be the same as before. If the price doesn't drop that much, the markup will increase. original: $3 cost, $4 price, 33% markup ($1 / $3 = 1/3 = 33%) proport lower: $1.50 cost, $2 price, 33% markup ($0.50 / $1.50 = 1/3 = 33%) not proport lower: $1.50 cost, $3 price, 50% markup ($1.50 / $3 = 1/2 = 50%) Since we were told that the markup increases when the price of raw-milk falls, we know that they are not proportionately lowering the price. To proportionately lower price would mean that the profit margin stays exactly the same, and we know the profit margin increases.

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

    49% picked this

  5. Consumers tend to complain more

    Out of Scope

    Relative vs. Absolute Out of Scope (farmers) When customers are complaining, bottlers are making their smallest profit margins but not necessarily their smallest profits. In the example we've used multiple times, the profit has stayed the same, at $1 per bottle. It's the markup %, the profit margin that is changing. $2 cost, $3 price, $1 profit, 50% markup $3 cost, $4 price, $1 profit, 33% markup $4 cost, $5 price, $1 profit, 25% markup But much more egregiously than that problem is the fact that this answer is talking about farmers, which we know nothing about, rather than milk bottlers.

    18% picked this

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