In a well-known experiment, small businesses in Sri Lanka that were randomly given cash grants of approximately $100 subsequently showed a significant increase in their monthly profits compared to businesses that did not receive a grant. A commentator, upon hearing this, argues: 'This isn't surprising. Of course if you give someone money, their financial situation improves. It doesn't prove anything about their investment opportunities.' Which statement best evaluates the primary flaw in this commentator's argument?
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A field experiment provided randomly selected small-business owners in Sri Lanka with unexpected cash grants, while a control group received nothing. The study found that businesses receiving the grants subsequently earned significantly higher profits than those in the control group. Based only on this result, what is the most direct economic interpretation?
Evaluating the External Validity of an Economic Experiment
Interpreting a Hypothetical Experimental Outcome
In a well-known experiment, small businesses in Sri Lanka that were randomly given cash grants of approximately $100 subsequently showed a significant increase in their monthly profits compared to businesses that did not receive a grant. A commentator, upon hearing this, argues: 'This isn't surprising. Of course if you give someone money, their financial situation improves. It doesn't prove anything about their investment opportunities.' Which statement best evaluates the primary flaw in this commentator's argument?
Evaluating an Alternative Experimental Design
A field experiment randomly provided cash grants to small-business owners, resulting in a significant increase in their monthly profits. This outcome indicates the businesses had profitable investment opportunities they were previously unable to fund. Based on this reasoning, a similar profit increase would be expected if the same experiment were conducted with large, established corporations that have easy access to bank loans.
Interpreting Divergent Experimental Results
An economic development agency conducts an experiment in a rural region. They randomly select 1,000 small-scale farmers and divide them into two groups. The 'treatment' group of 500 farmers each receives a one-time, no-strings-attached cash grant of $200. The 'control' group of 500 farmers receives nothing. Both groups' farm profits are tracked for one year. The study finds that the average annual profit for the treatment group is 50% higher than the control group. Which of the following is the most robust conclusion that can be drawn from this evidence?
Calculating and Interpreting Return on Capital
Justifying the Experimental Design