This page provides CAT 2025 VARC Slot 1 with detailed solutions and analysis. Download the free PDF to practice real CAT questions and boost your preparation.
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Sentence 3 starts by discussing how women are
socialized to suppress their anger, setting the tone
for the rest of the paragraph.
Sentence 4 elaborates on the difficulties some
women face in expressing their anger, with the
speaker’s role as a coach to help them express it
more openly.
Sentence 2 follows by explaining how some
women, once they break the taboos around
expressing anger, find it liberating.
Sentence 1 wraps up the paragraph by reflecting
on how managing anger shapes one’s life and
character.
So, the correct sequence is: 3, 4, 2, 1.
4
Actual passage
They evoke a time when people still bought table
silver for dining rooms. Timothy Schroder put it
succinctly in suggesting that electric light and
eating in the kitchen eroded this need. As he
explained to the author, ‘Silver, when illuminated
by flickering candlelight, comes alive and almost
dances before the eyes, but when lit by electric
light it becomes flat and dead.’ Domestic and
economic changes may have worked against the
market, but the London silver trade remained
buoyant, thanks to the competition of collectors
seeking grand display silver at the top end, and
the buyers of ‘collectables’, like spoons and wine
labels and ‘novelties’, at the bottom. Historically,
silver has been, and still is, an important element
in the business of ‘show’ visible in private houses,
churches, government and diplomacy. Another
factor that came into play was the systematic
collection building of certain American museums
over the period. Boston, Huntington Art Gallery and
Williamsburg, among others, were largely supplied
by London dealers.
Source: https://www.delanceyplace.com/viewarchives.
php?p=5262
✅ Correct Answer: Option 3
________________________________________
Step 1 — Identify the Core Thematic Flow of the Paragraph
Before placing the given sentence, we must understand the paragraph’s progression.
The paragraph discusses:
• The decline in the need for silver display due to electric lighting and changes in dining practices.
• How electric light diminished silver’s aesthetic appeal.
• Despite these changes, the London silver trade remained strong, driven by collectors and niche buyers.
• Additional support came from American museums building systematic collections, supplied by London dealers.
Thus, the paragraph moves from:
Decline in domestic display need → Continued market buoyancy → Institutional demand
________________________________________
Step 2 — Understand the Missing Sentence
“Historically, silver has been, and still is, an important element in the business of ‘show’ visible in private houses, churches, government and diplomacy.”
This sentence establishes:
• The historical importance of silver as a display object
• Its role in public and private prestige
• The idea of silver as part of the culture of “show”
It functions as a conceptual starting point.
________________________________________
Step 3 — Evaluate Each Placement Option
❌ Option 1 (Before the Timothy Schroder sentence)
If inserted here, the paragraph would begin with a broad historical statement about silver as “show.”
However, the very next sentence discusses how electric light eroded this need.
This creates an abrupt shift without context explaining why the need was eroded.
The flow becomes slightly disjointed.
________________________________________
❌ Option 2 (After the candlelight explanation)
Placing it here disrupts the logical development.
The paragraph is discussing how electric lighting made silver appear “flat and dead.”
Suddenly inserting a broad historical statement here breaks the continuity between cause (electric light) and consequence (declining need).
________________________________________
✅ Option 3 (After the discussion of collectors and niche buyers)
Let us observe the sequence:
• Domestic and economic changes reduced demand.
• Yet the London silver trade remained buoyant.
• It survived due to collectors and buyers of display silver.
• Then comes the missing sentence about silver historically being central to “show.”
• After that, the paragraph moves to American museum collections.
Why this works best:
1. The paragraph has already shown that silver retained value in display culture.
2. The missing sentence reinforces the idea that silver has long been associated with prestige and display.
3. It serves as a conceptual bridge between private collectors and institutional collectors (American museums).
4. It generalises the idea of “display” before giving the museum example.
Thus, the flow becomes:
• Decline in domestic display due to lighting
• Market resilience via collectors
• Historical importance of silver in display culture
• Institutional collection building
This maintains coherence and logical progression.
________________________________________
❌ Option 4 (At the very end)
Placing it at the end weakens the conclusion.
The paragraph already ends with a concrete example — American museums being supplied by London dealers.
Ending with a broad historical statement feels like a backward move from specific example to general background.
2143
Original paragraph It’s a case of it’s easy once you’ve thought of it’ in the political sphere. It can in fact be integrated into any function (education, medical treatment, production, punishment); it can increase the effect of this function, by being linked closely with it; it can constitute a mixed mechanism in which relations of power (and of knowledge) may be precisely adjusted, in the smallest detail, to the processes that are to be supervised; it can establish a direct proportion between ‘surplus power’ and ‘surplus production’. In short, it arranges things in such a way that the exercise of power is not added on from the outside, like a rigid, heavy constraint, to the functions it invests, but is so subtly present in them as to increase their efficiency by itself increasing its own points of contact. The panoptic mechanism is not simply a hinge, a point of exchange between a mechanism of power and a function; it is a wav of making zo6 Panopticism power relations function in a function, and of making a function function through these power relatiarns
4
Sentence 1 introduces the idea of freedom over
death and its moral importance, setting the stage
for the discussion.
Sentence 2 supports this idea by emphasizing
that the freedom to shape the timing and
circumstances of death should be central to the
conversation.
Sentence 3 continues by suggesting that
legalizing assisted dying is a further step in realizing
this freedom over death.
Sentence 5 acknowledges the complexity of
freedom as a philosophical notion, but this does
not detract from the overall flow of the discussion
on freedom over death.
Sentence 4 deviates because it talks about
endorsing freedom over death through people’s
opinions and choices regarding medical assistance
in hastening death. It is less about the moral or
philosophical argument for freedom over death
and more about how people might support this
freedom through actions. This makes it less
consistent with the general tone and purpose of
the other sentences.
Thus, Sentence 4 is the odd one out.
1
Option 1 accurately reflects the main points of the passage. It explains how noise can create order (e.g., the paradox of fish schooling), then proceeds to discuss how complex systems are vulnerable to heavy-tailed cascades (e.g., the increased probability of extreme events). It also touches on the concept of nonstationarity (changes in rules and perceived costs) using an example from the COVID-19 market disruption. Option 2 is incorrect because it focuses on the stabilization of averages and policy response but misses the more nuanced aspects of tail events and nonstationarity in the passage. Option 3 is not correct because it overemphasizes evolutionary biology and rejects its application to markets or public health, which is not a point made in the passage. The passage uses evolutionary biology as an example, not to reject its relevance in social dynamics. Option 4 focuses too narrowly on speculative entrants and market inefficiency, which is only a small part of the broader discussion of complex systems, tail events, and nonstationarity in the passage.
4
Option 4 is key because it addresses the idea that individuals adjust their behavior based on observed infections and the actions of others. This assumption aligns with the passage’s argument that local responses and behavior can interact, creating large-scale patterns that may counteract the app’s intended purpose of reducing risk. If people alter their behavior based on the app’s alerts (such as avoiding infected individuals), these adjustments could lead to unexpected interactions, potentially increasing the spread rather than reducing it.
Why the other options are incorrect:
Option 1 is not relevant because it focuses on uninstalling apps and systematic bias in routing decisions, which isn’t necessary to support the idea that behavior changes at the local level can lead to risky interactions. The passage is more concerned with how behavior changes due to interactions with the app, not with app uninstallation or routing biases.
Option 2 assumes that urban networks have uniform traffic conditions, but this doesn’t address the core issue of how individual behavior is influenced by the app and leads to unintended consequences. The uniformity of traffic conditions does not impact the local adjustments that could lead to risky behavior, which is central to the passage’s argument.
Option 3 is also irrelevant because it assumes that app alerts always provide precise location data. While this may be true for the app’s functionality, it doesn’t directly support the argument that people’s behavior changes in response to others’ actions, which is the crux of the passage.
2
Option 1 is supported by the passage. It discusses how heavy-tailed events (such as stock market crashes or pandemics) are larger and more frequent than expected under normal distributions, which complicates forecasting and risk management, particularly in collective settings shaped by contagion and copying behavior
>Option 3 is supported by the passage. It uses examples like runs on banks and toilet paper scrambles to illustrate how contagion can amplify local choices into system-wide cascades that lead to unexpected patterns, even though participants did not intend to create them.
Option 4 is supported by the passage. It explains how learning (such as observing shocks) can change the rules or the perceived costs of actions. This in turn supports the idea of second- order tail events, where a rare shock can increase the likelihood of further large events.
Option 2, however, is not supported by the passage. While the passage discusses the dynamics of the COVID-19 financial market rebound, it does not attribute the entire recovery solely to displaced sports bettors. The passage mentions that these new players might have contributed to market inefficiencies, but it does not claim they were the overriding cause of the recovery. Therefore, Option 2 makes an unsupported inference.
Thus, Option 2 is the correct answer.
4
The passage’s claim suggests that a first-order tail event (such as a significant shock) raises the probability of further tail events in a complex system. This implies that a large event can trigger more frequent extreme outcomes (second-order tail events) due to interdependencies and systemic feedback loops in the system. Option 4 supports this claim because it describes
the phenomenon following a major equity crash, where researchers find dense clusters of large daily moves for several weeks. This indicates that extreme events occur far more frequently than normal, reinforcing the idea that the first-order tail event (the crash) raises the likelihood of further extreme events, such as additional large daily moves. It provides direct evidence of second- order tail
events in the context of financial markets.
Why the other options are incorrect:
Option 1 contradicts the passage’s claim. River discharge records showing normal distribution with thin tails suggest that extreme events do not happen more frequently or in greater magnitude than expected. This is not in line with the idea of first-order tail events raising the probability of further extreme events.
Option 2 is also not supportive of the passage’s claim. If epidemic networks show no rise in the frequency or size of later extreme clusters, it suggests that the super-spreading episodes do not lead to further extreme events, which goes
against the idea of tail events feeding back into the system to trigger more extreme outcomes. Option 3 describes seismic activity returning to baseline without aftershocks, implying independence between events . This contradicts the passage’s claim that a first-order tail event raises the probability of subsequent extreme events.
1
Sentences 2, 3, 4, and 5 all focus on the immersive and physical viewing experience of the Bayeux tapestry — how it was displayed, how viewers stood in the centre, and how scenes interacted to engage the senses.
Sentence 1, however, talks about the tapestry being used to show the downfall of the English and rise of the Normans (political purpose).
This shifts the theme from viewer experience to historical messaging, breaking coherence.
Therefore, Sentence 1 is the odd one out.
4
Option 4 accurately captures the essence of the passage by stating that aging leads to less effective apoptosis, which in turn causes zombie cells to accumulate, leading to inflammation that can accelerate aging and contribute to chronic diseases. This summary directly
addresses the key points about how the accumulation of zombie cells due to a less effective immune system causes inflammation, which in turn results in chronic health problems and accelerated aging.
Why the other options are incorrect:
Option 1 is not as precise because it oversimplifies the idea by stating that dead cells accelerate inflammation and weaken the immune system. The passage focuses on senescent or zombie cells, which are damaged but not dead. Additionally, it emphasizes chronic diseases rather than just aging, which makes this summary incomplete.
Option 2 is incomplete because it only defines what zombie cells are, without addressing their role in chronic inflammation and aging as explained in the passage.
Option 3 partially summarizes the passage, but it misses the critical point that zombie cells contribute to inflammation, and that this accumulation leads to chronic diseases. It stops at the explanation of the immune system’s role without tying i t to the consequences of
inflammation and chronic health problems.
1
Option 1
The missing sentence is: “Everything is old-world, traditional techniques from Mexico,” Ava emphasizes.
Option 1 fits naturally in the paragraph because it provides an introductory statement from Ava, emphasizing the old- world, traditional techniques. This fits perfectly before the explanation of how the sisters craft the guitarrón using traditional methods like tacote wood and hand tools. The sentence sets the tone for the detailed discussion of their craftsmanship and their adherence to traditional methods.
2
Option 2 captures the essence of the passage as it emphasizes:
Drawing inspiration from diverse cultures respectfully, which is the main theme of the passage.
The thin line between inspiration and cultural appropriation is highlighted, and it mentions that cultural appropriation involves borrowing without proper
acknowledgment.
The broader societal impacts, including power imbalances, are also addressed, aligning with the passage’s discussion about the consequences of cultural appropriation.
Why the other options are incorrect:
Option 1 oversimplifies the idea, focusing only on the choice between inspiration and appropriation, without mentioning the broader societal impacts, which are crucial in the passage.
Option 3 lacks focus on the thin line between inspiration and appropriation and does not address the societal impact or the need for respect and acknowledgment, which is a key part of the passage.
Option 4 is close, but it focuses more on how the elements are borrowed and doesn’t fully encapsulate the globalized world context or the impact on societal perceptions and power imbalances.
1
Option 1 is the best answer because the passage discusses two common criticisms of electronic music: whether it can be considered music at all and whether it is “inhuman.” The author addresses these concerns by explaining the nature of electronic music, its creation, and the personal involvement of composers, aiming to defend electronic music against these charges.
Option 2 is partially relevant but not the main focus of the passage. The author mentions the differences between nineteenth-century composers and modern composers (like Stravinsky), but this is not the primary goal of the passage. The main aim is to defend electronic music, not to focus on historical distinctions.
Option 3 is not the best choice because the passage does not primarily focus on differentiating electronic music from other types of music.
Rather, it defends electronic music against specific objections and explores its nature and creation.
Option 4 is incorrect because while the “serious- minded composer” is mentioned, the passage is not focused on defending them from Lejaren Hiller and Stravinsky specifically. The passage’s focus is broader, defending electronic music in general, especially against criticisms
about its “inhuman” qualities.
3
Option 1: Stravinsky’s description of music as “a form of speculation in terms of sound and time” allows the author to argue that electronic music can indeed be classified as music. This supports the idea that electronic music is a legitimate form of music, aligning with the first option.
Option 2: Stravinsky’s description challenges the traditional, emotional view of music and shifts towards a more objective, structural view. This complicates the notion of what is communicated through music, as it moves beyond emotional expression to a more speculative approach.
Option 4: Stravinsky’s view responds to earlier understandings of music, specifically the traditional view of music as emotional expression.
By framing music as “a form of speculation,” it expands upon and responds to earlier ideas about music and composition.
Option 3: Stravinsky’s description does not directly help us determine which sounds are musical and which are not. His view is more about how music is constructed and understood, rather than drawing a strict line between what is or isn’t music based on specific sounds.
Thus, the correct option is Option 3, as Stravinsky’s description doesn’t focus on distinguishing musical
3
The phrase “sui generis” is Latin and translates to “of its own kind” or “unique.” In the context of paragraph 3, the phrase refers to the composer’s pursuit of unique, distinctive forms and languages in electronic music. The composer is exploring forms that are particular to the medium of electronic music, rather than relying on traditional or generic approaches.
Option 1 (Unaesthetic) is incorrect because “sui generis” does not imply anything about being unaesthetic. It refers to something unique, not lacking in beauty or style.
Option 2 (Generic) is incorrect because “sui generis” suggests the opposite of generic—it refers to something that is unique, not generalized or common.
Option 4 (Indescribable) is incorrect because “sui generis” means “of its own kind” and is not directly linked to the idea of something being indescribable.
Therefore, Option 3: Particular is the best choice, as it aligns with the idea of unique or specific forms and languages in the context of electronic music composition.
1
Option 1 accurately captures the relationship between the communication problem mentioned in paragraph 2 and the questions at the beginning of the passage. The initial questions about whether electronic music can be considered music and whether it is “inhuman” stem from a lack of understanding of electronic music. The communication problem arises because electronic music uses a new language of forms and unfamiliar terms, making it hard for some to view it as “true” music. However, the passage suggests that this barrier can be overcome once the audience understands the new forms and language used in electronic music.
Option 2 is incorrect because the communication problem is directly related to the earlier questions about whether electronic music can be considered music, and not unrelated as this option suggests.
Option 3 misinterprets the relationship. The passage doesn’t suggest that the unfamiliar language of forms means that electronic music cannot be seen as music; rather, it highlights that this unfamiliarity is what initially complicates people’s understanding of electronic music as music. The key point is that this complication can be overcome.
Option 4 is incorrect because the passage does not argue that the difficulty in understanding electronic music makes it more valid as music. Instead, it focuses on how the communication problem arises from the unfamiliarity with electronic music’s structure, which can be clarified with further understanding.
4
b>“Alienists” in the passage refers to physicians who specialized in the study of mental illness and the care of the insane during the nineteenth century. The passage explains that these
professionals were the predecessors of modern psychiatrists, neurologists, and psychologists. Option 1 is incorrect because it refers to extraterrestrials or “aliens,” which is unrelated to the context
of the passage, which discusses the medical field and mental illness.
Option 2 is also incorrect as it refers to immigrants or “aliens,” which again is not the context of the passage. The term “alienist” in this context specifically relates to mental health professionals, not to immigrants.
Option 3 is incorrect because while the alienists were indeed pushing the boundaries of their field, the passage defines them more specifically as physicians specializing in the care of the insane, not as professionals whose fields became unrecognizable.
Therefore, Option 4 is the best answer, as it accurately reflects the role of alienists as described in the passage.
2
In this context, “confession” does not refer to an admission of guilt or the assertion of a characteristic such as race or gender, but rather is used in a metaphorical sense. The word “confession” here can be understood as referring to the religious practice of confession, where individuals openly declare or profess their beliefs. In this context, the term likely refers to the defendant’s religion or faith—perhaps the way they express their beliefs or identify religiously. The “precariousness of judgments” part of the sentence suggests that the legal system can be influenced by how the defendant’s religion or belief is perceived, further complicating the mental state judgments. Thus, confession here is likely metaphorical, representing a religious affiliation or declaration.
Why the other options are incorrect:
Option 1: The word “confession” here does not refer to the defendant admitting to a crime, so this interpretation is not accurate.
Option 3: The sentence does not imply that the confession is false or related to the verb “dint” as a past tense of “didn’t.” The focus is on how perceived differences like race, disease, or confession affect legal judgments.
Option 4: While confession can sometimes mean “professing,” in this case, it’s more metaphorical and refers to religious affiliation, not a declaration of race, gender, or disease.
4
In the last paragraph, the passage discusses how middle- class, white, professional men (physicians and lawyers) were bound together by various societal and professional factors such as
class, race, gender, and shared networks. However, the passage also points out that these men were divided by contests over the borders of criminal responsibility. This refers to the professional disagreements or differences between them regarding the definitions and boundaries of criminal responsibility—a key concept that ties them together in their work, but also creates professional division.
Why the other options are incorrect:
Option 1 (Eccentricity and aggression): This is not mentioned in the paragraph. The focus is on professional division and shared societal factors, not on personal traits like eccentricity or aggression.
Option 2 ( The opinions of family and neighbors): While family and neighbors play a role in the context of mental science, this option does not capture the central professional connection between physicians and lawyers, which is more focused on criminal responsibility than personal opinions.
Option 3 (Empathy and imagination): This option is not supported by the paragraph. The passage does not mention empathy and imagination as key factors that connect these professionals. The focus is on professional disagreements over criminal responsibility.
4
The passage focuses on how judgments about a defendant’s mental state (such as insanity) are made in the legal context, and how these judgments are tied to the legal concepts of punishment and responsibility. It discusses how insanity is evaluated in court, with physicians and lawyers becoming involved in making these assessments, and how criminal responsibility is ultimately tied to whether a defendant is judged mentally sound or not. The passage emphasizes the precariousness of judgment in such cases, especially when a defendant is perceived as “unlike” the officials (due to differences like race, gender, or disease).
Thus, the concepts in Option 4 align most closely with the concerns and arguments in the passage, which revolves around judgment,
insanity,
punishment, and responsibility.
Why the other options are incorrect:
Option 1 (Empathy, Prosecution, Knowledge, Business): Although empathy and prosecution are related to legal judgments, business and knowledge are not directly central to the passage’s focus on legal and medical definitions of responsibility.
Option 2 (Judgement, Belief, Accounts, Patronage): While judgment is a key concept, belief, accounts, and patronage do not directly capture the passage’s focus on insanity, punishment, and legal responsibility.
Option 3 (Assessment, Empathy, Prosecution, Patriotism): While assessment and prosecution are relevant to the legal and medical context, empathy and patriotism are less central to the passage’s primary focus on insanity and criminal responsibility.
2
b>Question Explanation
The question asks for the best summary of the passage, meaning the option that captures all major ideas without distortion, remains proportionate, and avoids introducing extra claims not supported by the passage. The passage discusses why some studies argue that income inequality can promote economic growth, focusing mainly on three channels:
• investment indivisibilities,
• incentives/moral hazard,
• governance/agency problems. It also reports empirical findings:
• short- and medium-term positive effects,
• long-run negative correlation.
The passage does not discuss human capital, fertility, or political instability.
Correct Answer: Option 2 Correct Answer Explanation
Option 2: The passage outlines investment, incentive, and governance channels through which income inequality may support economic growth and reports short-term gains while noting long-term drawbacks.
This accurately summarises the key components of the passage: It mentions investment , incentive, and governance channels, which correspond directly to the three arguments in the passage. It acknowledges the short-term positive impact of inequality and the long- term drawbacks, exactly as the empirical findings indicate. It is balanced, complete, and faithful to the passage without adding unrelated themes. This makes it the most precise and comprehensive summary.
Incorrect Answers and Explanations
Option 1: “The passage confines its discussion to financing gaps and corporate control… human capital, fertility, redistribution…” Incorrect because it attributes themes not present in the passage ( human capital, fertility,
redistribution). It also ignores the incentive/moral hazard channel and the empirical findings on short- vs long-run effects. The summarisation is therefore distorted and incomplete.
Option 3: “The passage claims that evaluating the effect of inequality…
without considering short- and long- term consequences is misguided.”
Too narrow: the passage does more than just warn about interpretation; it outlines three theoretical mechanisms favouring inequality-led growth. It also presents empirical evidence showing both positive and negative effects, not merely an admonition about evaluation. Thus, it under- represents the content.
Option 4: “The passage argues that inequality accelerates growth while emphasising human capital, fertility, political instability…” Factually wrong: the passage does not discuss these themes at all. It misrepresents the author’s stance: the passage does not argue unequivocally that inequality accelerates growth; it simply reports studies showing short-run positives and long- run negatives. Hence, the option is inaccurate and inflated.
3
Question Explanation
The question asks for the opposite of democratisation, i.e., a process that moves a political system
away from broader participation, representation, and accountability toward reduced suffrage, diminished political competition, and concentrated power. Democratisation expands rights; its opposite contracts them. The correct option must therefore reflect a shift toward authoritarian or autocratic rule, not merely policy changes or mislabelling.
Correct Answer: Option 3 Correct Answer Explanation
Option 3: After the emergency decree, the regime shifted toward authoritarianism as suffrage narrowed and opposition parties were deregistered.
This option describes a regime that, after an emergency decree, moved toward authoritarianism, characterised by: Narrowing of suffrage, Deregistration of opposition parties, Contraction of political participation and contestation. These changes directly reverse the defining features of democratisation. The description is precise, structural, and accurately reflects a transition away from democratic norms, making it the best opposite.
Incorrect Answers and Explanations
Option 1: “The coalition imposed term limits and strengthened judicial review… to entrench autocratic rule.”
Although “autocratic rule” hints at non-democracy, term limits and strengthened judicial review are actually democracy-enhancing mechanisms. The description is internally contradictory; its components do not accurately depict a reversal of democratisation. Thus, it is conceptually flawed.
Option 2: “Corporate donations were capped… portrayed as establishing an oligarchy.”
Capping corporate donations and providing public funding are democratic reforms, not the opposite. Labelling it an “oligarchy” is rhetorical, not substantive. The political structure described does not actually reduce participation or rights.
Option 4: “Municipalities adopted participatory budgeting and recall elections… called totalitarianism.”
Participatory budgeting and recall elections
increase democratic participation. Calling it “totalitarianism” is a misuse of the term and does not reflect the actual political process described.
Therefore, it does not represent an opposite of democratisation.
1
Question Explanation
The question asks for the primary function of the three-part case presented in the first half of the passage. The passage outlines three mechanisms—investment indivisibilities, moral hazard and incentives, and corporate governance/free-rider issues—each used by certain studies to argue why income inequality may promote economic growth, specifically under certain economic and institutional conditions.
The correct option must capture the conditional, mechanism-driven, and short-term oriented nature of these arguments.
Correct Answer: Option 1 Correct Answer Explanation
Option 1: inequality can aid short-term growth in settings with high sunk costs, incentive alignment, and concentrated ownership.
This option accurately captures the function of the three-part case: It states that inequality can aid short-term growth, matching the empirical evidence cited later in the passage. It correctly identifies the relevant conditions: high sunk costs, incentive alignment problems , and concentrated ownership—the three channels the passage discusses. It reflects the limited,
context-dependent argument, not a universal claim. Thus, this option mirrors the actual purpose of the theoretical arguments: explaining how inequality may support growth under particular circumstances.
Incorrect Answers and Explanations
Option 2: “Mature stock markets make wealth concentration unnecessary…”
This diverges from the passage. The passage does not argue that mature stock markets make concentration unnecessary; it simply states that without such institutions, concentration is needed. It shifts the focus to investment harm and mischaracterises the theory’s purpose.Therefore, it does not capture the function of the three-part case.
Option 3: “Dispersed ownership speeds corporate decision-making…”
This reverses the passage’s governance argument. The passage claims dispersed ownership creates free-rider problems, which inequality (through concentrated ownership) may mitigate. It is factually inconsistent and does not explain the purpose of the three mechanisms. Hence, it is incorrect.
Option 4: “Inequality boosts growth in every period and type of economy…” Overgeneralised and inaccurate. The passage explicitly avoids universal claims and presents: short-term positive effects, long-term negative or mixed outcomes, depending on institutional contexts. This option contradicts both the theoretical and empirical content.
4
Question Explanation
The question asks which option best reflects the incentive or moral hazard argument described in the passage.
That argument claims:
When effort is unobservable, firms must design compensation schemes that reward performance so that workers have incentives to exert high effort.
If everyone is paid equally regardless of output, incentives weaken and growth suffers.
ownership in relation to corporate governance.”
This refers to the governance/ free-rider argument, not the incentive/moral hazard argument. It is about ownership concentration solving monitoring problems, not creating incentives for worker effort.
Option 2: “Rents protected by market power that enlarge top incomes without linking pay to results.”
This creates inequality, but not the type the theory defends.
I t lacks performance l inkage, undermining incentives instead of strengthening them. Therefore, it contradicts the moral hazard logic.
Option 3: “Wages are determined by tenure rather than output to ensure equity.”
This is explicitly the opposite of the argument. Pay based on tenure eliminates the performance incentive and exacerbates moral hazard. It aligns with egalitarian wage structures, which the theory claims may reduce growth.
Therefore, some inequality—specifically performance- l inked pay—can improve productivity and growth.
The correct option must clearly embody
performance-based reward systems. Correct Answer: Option 4
Correct Answer Explanation
Option 4: “Pay rewards on verifiable performance for highly productive workers.”
This perfectly matches the essence of the moral- hazard argument: It links pay to measurable performance. It creates incentive-compatible inequality, where higher performers receive higher compensation. I t encourages effort and productivity, which the passage identifies as channels through which inequality can support growth. Thus, this is fully aligned with the theoretical mechanism discussed.
Incorrect Answers and Explanations
Option 1: “A regime that concentrates stock