gmat study guide

Recommendations on the best study guides to help you prepare for the GMAT exam.

Click for more info...
gmat practice exams

There are many practice tests available to help you prepare for the GMAT exam. Here are the best practice exams on the market.

Click for more info...

Most large corporations in the United States were once run by individual capitalists who owned enough stock to dominate the board of directors and dictate company policy. Because putting such large amounts of stock on the market would only depress its value, they could not sell out for a quick profit and instead had to concentrate on improving the long-term productivity of their companies. Today, with few exceptions, the stock of large United States corporations is held by large institutions—pension funds, for example—and because these institutions are prohibited by antitrust laws from owning a majority of a company’s stock and from actively influencing a company’s decision-making, they can enhance their wealth only by buying and selling stock in anticipation of fluctuations in its value. A minority shareholder is necessarily a short term trader. As a result, United States productivity is unlikely to improve unless shareholders and the managers of the companies in which they invest are encouraged to enhance long-term productivity (and hence long-term profitability), rather than simply to maximize short-term profits.

Since the return of the old-style capitalist is unlikely, today’s short-term traders must be remade into tomorrow’s long-term capitalistic investors. The legal limits that now prevent financial institutions from acquiring a dominant shareholding position in a corporation should be removed, and such institutions encouraged to take a more active role in the operations of the companies in which they invest. In addition, any institution that holds twenty percent or more of a company’s stock should be forced to give the public one day’s notice of the intent to sell those shares. Unless the announced sale could be explained to the public on grounds other than anticipated future losses, the value of the stock would plummet and, like the old-time capitalists, major investors could cut their losses only by helping to restore their companies’ productivity. Such measures would force financial institutions to become capitalists whose success depends not on trading shares at the propitious moment, but on increasing the productivity of the companies in which they invest.

1. In the passage, the author is primarily concerned with doing which of the following?

(A) Comparing two different approaches to a problem
(B) Describing a problem and proposing a solution
(C) Defending an established method
(D) Presenting data and drawing conclusions from the data
(E) Comparing two different analyses of a current situation

2. It can be inferred from the passage that which of the following is true of majority shareholders in a corporation?

(A) They make the corporation’s operational management decisions.
(B) They are not allowed to own more than fifty percent of the corporation’s stock.
(C) They cannot make quick profits by selling their stock in the corporation.
(D) They are more interested in profits than in productivity.
(E) They cannot sell any of their stock in the corporation without giving the public advance notice.

3. According to the passage, the purpose of the requirement suggested in lines 30-33 would be which of the following?

(A) To encourage institutional stockholders to sell stock that they believe will decrease in value
(B) To discourage institutional stockholders from intervening in the operation of a company whose stock they own
(C) To discourage short-term profit-taking by institutional stockholders
(D) To encourage a company’s employees to take an active role in the ownership of stock in the company
(E) To encourage investors to diversify their stock holdings

4. Which of the following best explains the author’s statement that “A minority shareholder is necessarily a short-term trader” ?

(A) The only way a minority shareholder can make money from stocks is to buy and sell stocks as prices fluctuate over short periods of time.
(B) Only a shareholder who owns a majority of a company’s stock can influence the trading price of the stock over a long period of time.
(C) A minority shareholder is prohibited by law from buying stock and holding it for long-term profits.
(D) Large institutions like pension funds cannot legally own a majority of any corporation’s stock.
(E) A minority shareholder rarely takes an interest in the decisions of a corporation’s board of directors.

5. The author suggests that which of the following is a true statement about people who typify the “old style capitalist” ?

(A) They now rely on outdated management techniques.
(B) They seldom engaged in short-term trading of the stock they owned.
(C) They did not influence the investment policies of the corporations in which they invested.
(D) They now play a much smaller role in the stock market as a result of antitrust legislation.
(E) They were primarily concerned with maximizing the short-term profitability of the corporations in which they owned stock.

Highlight to see answers: 1. B 2. D 3. C 4. A 5. B

Please post your explanations in the comments below!

In Roman times, defeated enemies were generally put to death as criminals for having offended the emperor of Rome. In the Middle Ages, however, the practice of ransoming, or returning prisoners in exchange for money, became common. Though some saw this custom as a step towards a more humane society, the primary reasons behind it were economic rather than humanitarian.

In those times, rulers had only a limited ability to raise taxes. They could neither force their subjects to fight nor pay them to do so. The promise of material compensation in the form of goods and ransom was therefore the only way of inducing combatants to participate in a war. In the Middle Ages, the predominant incentive for the individual soldier to participate in a war was the expectation of spoils. Although collecting ransom clearly brought financial gain, keeping a prisoner and arranging for his exchange had its costs. Consequently, several procedures were devised to reduce transaction costs.

One such device was a rule asserting that the prisoner had to assess his own value. This compelled the prisoner to establish a value without much distortion; indicating too low a value would increase the captive’s chances of being killed, while indicating too high a value would either ruin him financially or create a prohibitively expensive ransom that would also result in death.

A second means of reducing costs was the practice of releasing a prisoner on his word of honor. This procedure was advantageous to both parties since the captor was relieved of the expense of keeping the prisoner while the captive had freedom of movement. The captor also benefited financially by having his captive raise the ransom himself. This “parole” was a viable practice since the released prisoner risked recapture or retaliation against his family. Moreover, in medieval society, breaking one’s word had serious consequences. When, for example, King Francois I broke his word to the Emperor Charles V in 1525, his reputation suffered immensely.

A third method of reducing costs was the use of specialized institutions to establish contact between the two parties. Two types of institutions emerged: professional dealers who acted as brokers, and members of religious orders who acted as neutral intermediaries. Dealers advanced money for the ransom and charged interest on the loan. Two of the religious orders that became intermediaries were the Mercedarians and the Trinitarians, who between them arranged the ransom of nearly one million prisoners.

1. The primary purpose of the passage is to

(A) discuss the economic basis of the medieval practice of exchanging prisoners for ransom
(B) examine the history of the treatment of prisoners of war
(C) emphasize the importance of a warrior’s “word of honor” during the Middle Ages
(D) explore three ways of reducing the costs of ransom
(E) demonstrate why warriors of the Middle Ages looked forward to battles

2. It can be inferred from the passage that a medieval soldier

(A) was less likely to kill captured members of opposing armies than was a soldier of the Roman Empire
(B) was similar to a 20th-century terrorist in that he operated on a basically independent level and was motivated solely by economic incentives
(C) had few economic options and chose to fight because it was the only way to earn an adequate living
(D) was motivated to spare prisoners’ lives by humanitarian rather than economic ideals
(E) had no respect for his captured enemies since captives were typically regarded as weak

3. Which of the following best describes the change in policy from executing prisoners in Roman times to ransoming prisoners in the Middle Ages?

(A) The emperors of Rome demanded more respect than did medieval rulers and thus Roman subjects went to greater lengths to defend their nation.
(B) It was a reflection of the lesser degree of direct control medieval rulers had over their subjects.
(C) It became a show of strength and honor for warriors of the Middle Ages to be able to capture and return their enemies.
(D) Medieval soldiers were not as humanitarian as their ransoming practices might have indicated.
(E) Medieval soldiers demonstrated more concern about economic policy than did their Roman counterparts.

4. The author uses the phrase “without much distortion” in order

(A) to indicate that prisoners would fairly assess their worth
(B) to emphasize the important role medieval prisoners played in determining whether they should be ransomed
(C) to explain how prisoners often paid more than an appropriate ransom in order to increase their chances for survival
(D) suggest that captors and captives often had understanding relationships
(E) to show that when in prison a soldier’s view could become distorted

5. All of the following are mentioned in the passage as actions that were taken to ensure that ransoming prisoners was a profitable operation EXCEPT

(A) each prisoner was made to designate the amount of ransom to be paid for his return
(B) prisoners were released on the condition that they guaranteed that their ransoms would be paid
(C) professional intermediaries were employed to facilitate the smooth exchange of prisoner and ransom at a price to the prisoner
(D) religious orders acted as impartial mediators by arranging the trade-off of ransom and prisoner
(E) medieval rulers promised to aid soldiers in their efforts to collect ransom

6. In the author’s opinion, a soldier’s decision to spare an adversary’s life be linked historically to

(A) the economic relationship of the warring states
(B) the case with which a soldier could capture and subsequently imprison his enemy
(C) the economic gain from taking an enemy prisoner rather than killing him in combat
(D) technological advances in weaponry
(E) the desire for soldiers to uphold their word of honor

7. It can be inferred from the passage that the process of arranging ransoms during medieval times was

(A) more lucrative for medieval soldiers and kings than the winning of spoils
(B) a procedure so costly that it was not economically worthwhile for the captors
(C) futile for the captive since he risked recapture even after his ransom was paid
(D) a potential source of income for others aside from the captors of the prisoners
(E) handled only through Mercedarian or Trinitarian intermediaries

8. Which of the following best describes the organization of the passage?
(A) An assertion is made, briefly explained, and then several examples that refute the assertion are given.
(B) A hypothesis is offered, carefully qualified, and then supporting data is analyzed.
(C) A generally accepted historical viewpoint is presented in order to introduce discussion of its strengths and limitations.
(D) A historical analysis is made of a phenomenon and supporting details are offered.
(E) A historical dispute is introduced, and the case for one side is examined in detail.

Highlight to see answers: 1. A 2. A 3. B 4. A 5. E 6. C 7. D 8. D

Please post your explanations in the comments below!

The promise of finding long-term technological solutions to the problem of world food shortages seems difficult to fulfill. Many innovations that were once heavily supported and publicized, such as fish-protein concentrate and protein from algae grown on petroleum substrates, have since fallen by the wayside. The proposals themselves were technically feasible, but they proved to be economically unviable and to yield food products culturally unacceptable to their consumers. Recent innovations such as opaque-2 maize, Antarctic krill, and the wheat-rye hybrid triticale seem more promising, but it is too early to predict their ultimate fate.

One characteristic common to unsuccessful food innovations has been that, even with extensive government support, they often have not been technologically adapted or culturally acceptable to the people for whom they had been developed. A successful new technology, therefore, must fit the entire sociocultural system in which it is to find a place. Security of crop yield, practicality of storage, palatability, and costs are much more significant than had previously been realized by the advocates of new technologies. For example, the better protein quality in tortillas made from opaque-2 maize will be of only limited benefit to a family on the margin of subsistence if the new maize is not culturally acceptable or is more vulnerable to insects.

The adoption of new food technologies depends on more than these technical and cultural considerations; economic factors and governmental policies also strongly influence the ultimate success of any innovation. Economists in the Anglo-American tradition have taken the lead in investigating the economics of technological innovation. Although they exaggerate in claiming that profitability is the key factor guiding technical change—they completely disregard the substantial effects of culture—they are correct in stressing the importance of profits. Most technological innovations in agriculture can be fully used only by large landowners and are only adopted if these profit-oriented business people believe that the innovation will increase their incomes. Thus, innovations that carry high rewards for big agribusiness groups will be adopted even if they harm segments of the population and reduce the availability of food in a country. Further, should a new technology promise to alter substantially the profits and losses associated with any production system, those with economic power will strive to maintain and improve their own positions. Since large segments of the populations of many developing countries are close to the subsistence margin and essentially powerless, they tend to be the losers in this system unless they are aided by a government policy that takes into account the needs of all sectors of the economy. Therefore, although technical advances in food production and processing will perhaps be needed to ensure food availability, meeting food needs will depend much more on equalizing economic power among the various segments of the populations within the developing countries themselves.

1. Which of the following best describes the organization of the first paragraph?

(A) A suggestion is made and arguments in its favor are provided.
(B) A criticism is levied and an alternative proposal is suggested.
(C) A generalization is advanced and supporting evidence is provided.
(D) An example is analyzed and general conclusions are derived from it.
(E) A position is stated and evidence qualifying it is provided.

2. It can be inferred from the passage that the author was unable to assess the truth of which of the following statements about opaque-2 maize?

(A) It is a more recent innovation than the use of fish-protein concentrate.
(B) It can be stored as easily as other varieties of maize.
(C) It is more popular than the wheat-rye hybrid triticale.
(D) It produces tortillas of greater protein content than do other varieties of maize.
(E) It is more susceptible to insects than are other varieties of maize.

3. The passage mentions all of the following as factors important to the success of a new food crop EXCEPT the

(A) practicality of storage of the crop
(B) security of the crop yield
(C) quality of the crop’s protein
(D) cultural acceptability of the crop
(E) costs of production of the crop

4. According to the passage, the use of Antarctic krill as a food is an innovation whose future is

(A) basically gloomy but still uncertain
(B) somewhat promising but very tentative
(C) generally bright and virtually assured
(D) tied to the success of opaque-2 maize
(E) endangered by certain technical problems

5. The author suggests that, in most developing countries, extensive government intervention accompanying the introduction of a food innovation will

(A) usually be sufficient to guarantee the financial success of the innovation
(B) be necessary to ensure that the benefits of the innovation will be spread throughout the society
(C) provide the incentive necessary to convince landowners to try the innovation
(D) generally cost the country more than will be earned by the innovation
(E) normally occur only when the innovation favors large landowners

6. It can be inferred from the passage that the author would be most likely to agree with which of the following statements concerning the solution to food shortages in developing countries?

(A) The introduction of technological innovations to reap profits might alleviate food shortages to some degree, but any permanent solution can come only from effective governmental intervention in the socioeconomic system.
(B) Innovations in agricultural technology will be of little help, and perhaps even harmful, in combating food shortages, no matter how well designed they are to suit local circumstances.
(C) Long-lasting solutions will not be found until large landowners adopt improvements that will make production more efficient and thus more profitable.
(D) In order to achieve a meaningful solution to the problem of food shortages, the tastes of the general population must be educated to accept the new food products of modern agricultural technology.
(E) Although a short-term solution to food shortages can be achieved by importing food from other countries, a long-term solution requires a restructuring of the countries’ socioeconomic system.

7. The first paragraph of the passage best supports which of the following statements?

(A) Too much publicity can harm the chances for the success of a new food innovation.
(B) Innovations that produce culturally acceptable crops will generally be successful.
(C) A food-product innovation can be technically feasible and still not be economically viable.
(D) It is difficult to decide whether a food-product innovation has actually been a success.
(E) Triticale will not be a success as a food source for most developing countries.

8. The author provides a sustained argument to support which of the following assertions?

(A) Profitability is neither necessary nor sufficient for a new technology to be adopted.
(B) Profitability is the key factor guiding technological change.
(C) Economic factors and governmental policies strongly influence the ultimate success of any innovation.
(D) Opaque-2 maize is of limited benefit to poor families in developing countries.
(E) Innovations carrying high rewards for big agribusiness groups harm the poor.

9. The primary purpose of the passage is to discuss the

(A) means of assessing the extent of the world food shortage
(B) difficulties of applying technological solutions to the problem of food shortages
(C) costs of introducing a new food technology into a developing country
(D) Anglo-American bias of those trying to alleviate world food problems
(E) nature of the new technological innovations in the area of food production

Highlight to see answers: 1. C 2. E 3. C 4. B 5. B 6. A 7. C 8. C 9. B

Please post your explanations in the comments below!

gmat study guide

Recommendations on the best study guides to help you prepare for the GMAT exam.

Click for more info...
gmat practice exams

There are many practice tests available to help you prepare for the GMAT exam. Here are the best practice exams on the market.

Click for more info...
Click for more info
To get started with a FREE 3-week walkthrough of how to study for the GMAT, please enter your email below. We respect your email privacy and will never give away, trade or sell your email address.
* indicates required
The study guide is the best investment I'll ever make. It is so good and so detailed. If I don't make the 600 that I want, it'll be my fault. Thanks for such a wonderful job.
- Rushdat Hale