Thanks SudiptoGmat for bringing such a delicacy

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Well, this was indeed tough for me and took me around 2 min to reach C. Let's see why C is correct:
The given argument seems to be circular in reasoning and we need to find the CONCLUSION.
Only happiness is intrinsically valuable and rest are factors contributing to it.Think of this statement as Statue of Liberty in NY. It was crafted from a big piece of stone of height say 10,000 ft. Now, the bay near to it, the Brooklyn bridge, the NY city, etc are just adding to its beauty.
Now, coming back to the original question.
Some philospers >>> bad ppl dont deserve happiness >>> so, something apart from happiness is of intrinsic value >>> amount of happiness is related with the happiness brought for others.
(A) the notion that people can be deserving of happiness is ultimately incoherent [Really. This is simply irrelevant.
Incorrect]
(B) people do not actually value happiness as much as they think they do [This is not stated in the stimulus. Out of scope.
Incorrect]
(C) the judgment that a person deserves to be happy is itself to be understood in terms of happiness [
Correct]
(D) the
only way to be assured of happiness is to bring happiness to those who have done something to deserve it [Extreme case. This is the last premise of the stimulus but presented as an extreme case.
Incorrect]
(E) a truly bad person
cannot actually be very happy [This is an extreme case and against the argument. We are given that they dont deserve it but CANNOT is not what is stated.
Incorrect]