PrepTest 139, Section 4, Question 19
Professor: Economists argue that buying lottery tickets is(62 more words not shown)
Which one of the following,(7 more words not shown)
- AIndividuals spend, on(9 more words not shown)
- BInsurance companies generally(13 more words not shown)
- CTaking small financial(12 more words not shown)
- DIn general, the(24 more words not shown)
- EThe protection against(18 more words not shown)
Reading the argument
Insurance protects something you could lose. A lottery ticket offers something you might gain. That difference may matter more than the shared fact that the average payout is below the price.
The professor treats insurance as a counterexample to the economists' reasoning: we accept this purchase despite its unfavorable average payout, so the same kind of payout can't justify rejecting lottery tickets. One question is whether the economists would actually accept insurance as wise. The professor assumes that nobody would dispute it, but we haven't heard their view.
Even granting that insurance is sensible, the comparison needs work. Imagine paying a hypothetical $2,000 premium to protect a $500,000 home. You hope the house never burns down and you never need a payout. What you are buying is protection against a loss that could be devastating. Buying a lottery ticket to acquire an extra fortune serves a different purpose.
What we’re looking for
For the weaken question, I'd look for a relevant difference between the two purchases. If insurance provides an important benefit beyond its average dollar return, accepting insurance doesn't show that the economists' objection to lottery tickets is mistaken.
Working the answers
- A
The total amount people spend doesn't tell us what makes either purchase wise or unwise. Spending more on insurance could reflect its price, its value, or other factors. A doesn't explain why its unfavorable average payout is a poor comparison for the lottery's.
- B
A larger share retained by insurers would make insurance look even less attractive if we focused only on average money returned. Given the professor's assumption that insurance is still sensible, that would fit the professor's point that an unfavorable financial return needn't make a purchase unwise. It doesn't expose the relevant difference we need.
- C
The possibility of a much larger benefit from a small risk doesn't undermine the professor's defense of lottery purchases. If relevant here, it could make such purchases sound more attractive. It doesn't explain why insurance and lottery tickets should be judged differently.
- D
This offers a difference in odds, so it is more tempting. But it compares winning the grand prize with collecting any insurance settlement. It doesn't account for smaller lottery prizes or the amounts of the payouts. A more likely small payout could still leave a purchase with an unfavorable average return.
The professor already accepts that both average payouts are below their prices. Merely comparing these odds doesn't identify why insurance could nevertheless have a value that lottery tickets lack.
- ECorrect
Protection against a serious loss matters more to well-being than the chance of an extra windfall. That gives us a reason insurance could be wise despite its unfavorable average payout without granting the same defense to lottery tickets. The two purchases share a financial feature but differ in the benefit that can make accepting that feature worthwhile.
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