Direction for the following 7 (seven) items: Read the following five passages and answer the items (21-27) that follow. Your answers to these items should be based on the passages only.

People will invest in education whenever they are granted the economic freedom to fully enjoy its benefits. Again, this is for the obvious reason that the return on education increases as the level of economic freedom rises. When people, thanks to lower tax rates, are allowed to retain most of the higher income that they gain from each incremental level of education, it makes eminent sense to invest in education. On the other hand, when the government decides to tax the higher income of educated individuals at even higher rates, it makes very little sense to invest in educating oneself further. The same incentives apply to parents who decide on whether to invest in their children’s education.

With reference to the above passage, the following assumptions have been made:
1. Lower tax rates in a country invariably translate into greater investments in higher education.
2. Investment in the education of children ensures their economic freedom.
3. Economic freedom has a positive impact on building up human capital.
Which of the above assumptions is/are valid?

The correct answer is 3 only.

Step-by-step Explanation:

Let us analyze each assumption based strictly on the provided passage:

Analysis of Assumption 1:
"Lower tax rates in a country invariably translate into greater investments in higher education."
The word "invariably" makes this an absolute and overly strong claim. While the passage mentions that lower tax rates allow people to retain higher income, making it sensible to invest in education, it does not state that lower tax rates will always or invariably lead to higher investments in higher education without exception. Therefore, Assumption 1 is invalid.

Analysis of Assumption 2:
"Investment in the education of children ensures their economic freedom."
The passage explains that economic freedom encourages people to invest in education (economic freedom is the cause/condition that increases returns on education), not that investing in education automatically "ensures" or guarantees economic freedom. The cause-and-effect relationship is reversed here. Therefore, Assumption 2 is invalid.

Analysis of Assumption 3:
"Economic freedom has a positive impact on building up human capital."
Education is a key component of human capital. The passage explicitly states that "the return on education increases as the level of economic freedom rises" and that economic freedom motivates individuals and parents to invest in education. Thus, economic freedom positively impacts the development/building up of human capital (through education). Therefore, Assumption 3 is valid.

Conclusion: Only assumption 3 is valid.