PrepTest 138, Section 1, Question 19
David Warsh's book describes a great contradiction inherent(451 more words not shown)
The reference to railroads (first(7 more words not shown)
- Aresolve an ambiguity(8 more words not shown)
- Billustrate the difficulty(11 more words not shown)
- Ccall attention to(12 more words not shown)
- Dpoint to an(12 more words not shown)
- Epresent an example(10 more words not shown)
Reading the passage
Railroads are an example of an enterprise in which increasing returns already occurred. That matters because economists weren't trying to introduce the Pin Factory simply to make theory more complicated: they needed it to account for something in the real economy.
What we’re looking for
The example exposes the cost of leaving increasing returns out. An emphasis on the Invisible Hand and diminishing returns gives an incomplete picture of industries that operate differently.
Working the answers
- A
Railroads don't clarify an ambiguous meaning of the Invisible Hand. They illustrate the competing phenomenon that mainstream theory had de-emphasized.
- B
The paragraph does discuss failed attempts to model increasing returns, so this is tempting. But railroads illustrate that increasing returns occur, not what makes the mathematics difficult. The example establishes why economists needed the model, rather than explaining the technical obstacle to creating it.
- C
We're given an example, not evidence that industries with this characteristic are becoming more prevalent. Nothing about mentioning railroads establishes a growing number or share of such industries.
- DCorrect
Railroads show that increasing returns characterize actual enterprises. A mainstream approach emphasizing diminishing returns and the Invisible Hand was failing to account for that feature, which is the shortcoming the example brings out.
- E
The point isn't intense competition within transportation. It is increasing returns, which the author has connected to a tendency toward fewer competitors. The industry's being transportation is incidental to that function.
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