Practice Test: Reading Comprehension - 67 | 100 RCs for GMAT PDF Download

Directions: Read the given passage carefully and answer the questions as follows:

Most economists in the United States seem captivated by the spell of the free market. Consequently, nothing seems good or normal that does not accord with the requirements of the free market. A price that is determined by the seller or, for that matter, established by anyone other than the aggregate of consumers seems pernicious. Accordingly, it requires a major act of will to think of price-fixing (the determination of prices by the seller) as both “normal” and having a valuable economic function. In fact, price-fixing is normal in all industrialized societies because the industrial system itself provides, as an effortless consequence of its own development, the price-fixing that it requires. Modern industrial planning requires and rewards great size. Hence, a comparatively small number of large firms will be competing for the same group of consumers. That each large firm will act with consideration of its own needs and thus avoid selling its products for more than its competitors charge is commonly recognized by advocates of free-market economic theories. But each large firm will also act with full consideration of the needs that it has in common with the other large firms competing for the same customers. Each large firm will thus avoid significant price-cutting, because price-cutting would be prejudicial to the common interest in a stable demand for products. Most economists do not see price-fixing when it occurs because they expect it to be brought about by a number of explicit agreements among large firms; it is not.

Moreover, those economists who argue that allowing the free market to operate without interference is the most efficient method of establishing prices have not considered the economies of non-socialist countries other than the United states. These economies employ intentional price-fixing, usually in an overt fashion. Formal price-fixing by cartel and informal price-fixing by agreements covering the members of an industry are commonplace. Were there something peculiarly efficient about the free market and inefficient about price-fixing, the countries that have avoided the first and used the second would have suffered drastically in their economic development. There is no indication that they have.

Socialist industry also works within a framework of controlled prices. In the early 1970’s, the Soviet Union began to give firms and industries some of the flexibility in adjusting prices that a more informal evolution has accorded the capitalist system. Economists in the United States have hailed the change as a return to the free market. But Soviet firms are no more subject to prices established by a free market over which they exercise little influence than are capitalist firms; rather, Soviet firms have been given the power to fix prices.