Gmatclub Challenge - V06 #25 : Retired Discussions [Locked]
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Gmatclub Challenge - V06 #25

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Joined: 22 Jul 2009
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Gmatclub Challenge - V06 #25 [#permalink]

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01 Sep 2009, 18:03
Due to a sharp rise in the price of gasoline, commuters who drive to work in the center of the city are facing a large increase in transportation expenses that will limit the funds they have available to spend in other areas. In order to forestall a slowdown in the local economy, the city council has decided that fares on all forms of public transportation will be suspended for the next three months. Clearly, if commuters can get to work more cheaply, they will have more money left over to spend in other sectors of the economy, and the city’s finances on the whole will not be negatively affected by higher gasoline prices.

If all of the statements above are true, which of the following is most likely to be damaged by the city council’s plan?

* A local chain of service stations, which will see fewer customers during the daily commute.
* Members of the bus drivers’ union, who will be forced to add more routes and work longer hours.
* The city council’s budget, which will be unbalanced after receiving no revenue from transit fares for three months.
* Commuters who already use public transportation daily and who will face crowded conditions and travel delays.
* Commuters who do not live near public transportation routes and will not be able to take advantage of the suspended fares.

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Explanation provided:

Situation: The city council has responded to an increase in gasoline prices by making public transportation free. The council hopes that people will spend the money they do not pay for expensive gasoline in other sectors of the local economy.

Reasoning: Which of the following is the council’s plan most likely to harm? The council’s plan is concerned primarily with preserving the fluidity of the local economy and, to a lesser extent, maintaining the comfort of individual residents. The plan does not, however, contain provisions for preserving the city’s role in the local economy. If revenue from public transportation fares stops suddenly, the city will face a budget shortfall, which could ultimately be more damaging to the local economy than a reduction in consumer spending.

1. Although service stations would likely see some reduction in business, this is not the entity most likely to be damaged.
2. The passage is concerned mostly with economic damage; the inconvenience to bus drivers is both outside the scope of the passage and not actual damage.
3. This option correctly identifies the potential for the city council’s plan to backfire. Without revenue from public transportation, the council’s budget could easily become unbalanced and have a very negative impact on the local economy.
4. This option does not discuss an economic consequence of the plan, and it discusses more inconvenience than damage.
5. These commuters may not be able to take advantage of the free transportation, but they will not sustain any actual damage.

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If all of the statements are true, the city's budget would suffer due to loss of revenue from public transportation, but this loss would be at least partially compensated by increased tax revenues. It is possible that the increased tax revenues would be equal or greater than the loss of revenue from public transportation. This would be unlikely in the real world, but it would still be possible.

On the other hand, services stations would certainly incur in a loss or revenue; maybe not much, but would still generate less income and therefore be damaged by the city council's plan.

I believe the answer should be A.
_________________

Please kudos if my post helps.

Gmatclub Challenge - V06 #25   [#permalink] 01 Sep 2009, 18:03
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