LSAT Explanation PT 23, S3, Q1: Owners of deeply indebted and chronically

LSAT Question Stem

Which one of the following, if true, most helps to explain the surprising results of such investments? 

Logical Reasoning Question Type

This is a Paradox question. 

Correct Answer

The correct answer to this question is C. 

LSAT Question Complete Explanation

The question type for this problem is Paradox, which asks us to resolve the apparent contradiction in the passage. The passage discusses a situation where deeply indebted and chronically unprofitable small businesses sometimes try to convince others to invest in their companies. Although the money invested will be used to pay off debts rather than expand operations, these investments often earn handsome returns in the very first year. The paradox is: why do these investments result in good returns despite the fact that the money is used to pay off debts rather than stimulate sales growth?

To better understand this paradox, let's use a simple example. Imagine a small bakery that is heavily in debt and not making a profit. The owner manages to convince someone to invest money in the bakery, which they use to pay off their debts. Surprisingly, the investor gets a good return on their investment in the first year, even though the bakery's sales haven't increased.

Now let's analyze each answer choice to determine which one helps to explain this surprising result:

a) Investors usually choose to reinvest their returns on such investments.

- This answer choice does not explain the root cause of the good returns. It only tells us what investors do with their returns after they've received them. Therefore, it doesn't help to resolve the paradox.

b) Expanding production in such companies would usually require more funds than would paying off debts.

- This answer choice doesn't explain why paying off debts results in good returns. It only states that expanding production would be more expensive than paying off debts, which doesn't help us understand the surprising result.

c) Paying off debts, by saving a company the money it would otherwise owe in interest, decreases the company's overall expenses and thereby increases its profits.

- This is the correct answer choice. By paying off debts, the company saves money on interest payments, which reduces its overall expenses. This, in turn, increases the company's profits, resulting in a good return on investment for the investor. This explanation resolves the paradox.

d) Banks are reluctant to lend money to any company that is already heavily in debt and chronically unprofitable.

- This answer choice is off-topic, as it doesn't explain why the investments have good returns. It only explains why banks are hesitant to lend money to such companies, which is not the focus of the paradox.

e) If the sales of a company do not grow, there is usually little need to devote a large share of company resources to expanding production.

- This answer choice doesn't explain why investing in the company proves profitable. While it suggests that there may be few additional expenses in production, it doesn't help us understand why the investment results in a good return.

In conclusion, the correct answer choice is (c), as it explains that paying off debts saves the company money on interest payments, which decreases overall expenses and increases profits, resulting in a good return on investment for the investor. This explanation resolves the paradox presented in the passage.