PrepTest 126, Section 2, Question 24

Working the answers

• A

  Disputing this example doesn't tell us how often speculative bubbles occur elsewhere. Garber could reject the tulip classification without thinking bubbles are rare.

• B
  Correct

  The final paragraph says earnings from the millions of descendant bulbs “can be very high,” even when each bulb sells cheaply. That supports the expectation of at least recovering the original investment. It doesn't require us to claim that every buyer actually did so.

• C

  Garber gives a particular reason these high prices could be rational: the bulbs' earning potential. He doesn't establish that every price in every market without a speculative bubble must be rational. The absence of that one kind of bubble doesn't rule out every other reason a price might be irrational.

• D

  We learn nothing about all the investors' other decisions. A potentially reasonable tulip purchase doesn't establish rationality across their entire investments.

• E

  Garber disputes Mackay's classification of the episode. We're not told that Mackay considered the eventual low prices irrational. The discussion of rationality concerns whether the original high prices could be justified by earnings.