Demand For Computer Chips Skyrocketed With The Demand For PCs GMAT Reading Comprehension

Reading Passage Question

Demand for computer chips skyrocketed with the demand for PCs (personal computers) in the first half of the 1990s, making these extremely lucrative years for the semiconductor industry. With 1995 sales topping $150 billion, and with the release of powerful new software which required most PC users to upgrade their computers, sales were expected to continue to rise. However, late in 1995, the price of the most common memory chip dropped by over a third, and the book-to bill ratio for semiconductor manufacturers fell to around 0.9—for every $100 worth of chips produced, only $90 worth of new orders were received.

Ironically, it seems that world’s newest industry was susceptible to “hog cycles,” a phenomenon long recognized in its most ancient industry—farming. Producers tend to reduce their output when the demand for and price of the commodity they produce falls. However, in agriculture, supplies cannot adjust quickly to demand, since growing a crop or fattening an animal takes many months. Farmers are forced to fix next year’s output on current prices, which can lead to volatility in commodity prices. They cannot cut production even when demand drops, producing a glut and even lower prices. Conversely, when demand rises, there is often no means of quickly increasing production, leading to shortages and high prices. Similarly, the long lead times needed to build new semiconductor fabrication plants means that the supply of chips does not adjust smoothly to price changes. In late 1995 consumers largely chose not to upgrade their computers and abstained from using the newly released software; the anticipated rise in demand never occurred. The previous year’s large investment in plants yielded extra supplies of chips, and prices plunged.

“Demand for computer chips skyrocketed with the demand for PCs”- is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 4 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

Question 1
The primary purpose of this passage is to

1. argue for the development of more effective means of detecting long-term fluctuations in the price of semi-conductors
2. contrast the problems in high tech industries with problems in low-tech industries
3. show how a mechanism that leads to swings in the price of farm produce also leads to swings in the price of computer chips
4. prove that wild swings in the prices of semiconductors and farm produce are inevitable
5. show that primary and high-technology industries share many of the same problems

Question 2
Which of the following best describes the structure of the passage?

1. An situation is outlined and then a theory is posited to explain that event.
2.  An event in one industry is described and discussed in the context of problems in similar industries.
3.  A problem is outlined and a mechanism for controlling this problem is posited.
4.  An event in one industry is explained by discussing analogous events in a different industry.
5. Related problems in two different industries are compared and contrasted.

Question 3 
It is most likely that the author states that “for every $100 worth of chips produced, only $90 worth of new orders were received” in order to

1. explain what is meant by the term “book-tobill” ratio
2. give a concrete example of the fall in chip price
3.  illustrate that the vagaries of chip prices were not anticipated by the semi-conductor industry
4. provide an example that would illustrate the action of the “hog cycle”
5. demonstrate that the anticipated rise in demand for chips did not occur

Question 4
It can be inferred from the information in the passage that a sharp and unexpected increase in the demand for memory chips would result in

1. a rapid increase in the number of such chips produced, and a subsequent glut in the supply of such chips
2. reduced construction of new semiconductor fabrication plants since higher prices result in higher profits without increased investment
3. a scarcity of such chips and a subsequent rise in their sale price
4. a substantial decrease in the book-to-bill ratio for the semi-conductor industry
5. a short term upward adjustment in the price of chips, followed by a slow decrease in price as new fabrication plants come on-line

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