For several years, per capita expenditure on prescription drugs in Voronia rose by fifteen percent or more annually. In order to curb these dramatic increases, the ministry of health prohibited drug manufacturers from raising any of their products' prices. Even though use of prescription drugs did not expand after this price freeze, per capita expenditure for prescription drugs continued to increase by a substantial percentage each year. Which of the following, if true, most helps to explain why the ministry's action did not achieve its goal? (A) After price increases were prohibited, drug manufacturers concentrated on producing new medications to replace existing products. (B) The population of Voronia rose steadily throughout the period. (C) Improvements in manufacturing processes enabled drug manufacturers to maintain high profit levels on drugs despite the price freeze. (D) In addition to imposing a price freeze, the government encouraged doctors to prescribe generic versions of common drugs instead of the more expensive brand-name versions. (E) After price increases were prohibited, some foreign manufacturers of expensive drugs ceased marketing them in Voronia. I cannot get my head round the reasonings of the OA. No matter how I look at it, D seems the best answer. If D is true, wouldn’t per capita expenditure of drugs increase?

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For several years, per capita expenditure on prescription drugs in Vor

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rohitrajishu

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28 Dec 2022, 04:14

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cialit0506

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I cannot get my head round the reasonings of the OA. No matter how I look at it, D seems the best answer. If D is true, wouldn’t per capita expenditure of drugs increase?

Quite convincing and perfect!!

the reason why (a) is correct is that new drugs are not subject to the price controls (since there is no current price at which they can be frozen - the price controls only apply to drugs that already have a price). therefore, these new drugs could indeed account for increased costs, even if consumers are not purchasing any more drugs than they did before.

the word "raise" only makes sense for something that already has a current price -- i.e., a drug that is already on the market.

-Answer provided by RonTargetTestPrep here (https://www.manhattanprep.com/gmat/foru ... t2413.html)

amirsaf1

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24 Jan 2023, 10:28

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Why A is correct? Even if we try to use common knowledge or out of the scope info here, it still does not make sense. Ok, let's just assume that new medications that replace existing products were priced higher, but then how do we know the new meds were already being purchased by consumers? "concentrated" is written on A. There is no clear timeline here. If they concentrated on developing the new meds and the new meds were still in development, A does not make sense because the new meds HAVE NOT REPLACED the existing meds yet. Anybody can help to explain?

KarishmaB

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24 Jan 2023, 22:15

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amirsaf1

Note that we are looking back in time over a substantial period. The last sentence says "Even though use of prescription drugs did not expand after this price freeze, per capita expenditure for prescription drugs continued to increase by a substantial percentage each year."
So if we are talking today, we could be looking at say, 2015. Till 2015, for several years expenditure increased by 15%. So Govt came up with price freeze for current drugs. But post that too, the expenditure kept increasing every year.

How would you explain this? If we got to know that post the price freeze, the companies got busy into replacing current drugs, that explains why the price kept increasing. Since they were not allowed to increase price of current drugs, they replaced those with higher priced drugs. Basically (A) gives us the way they could have circumvented the law.

Note that this is an official question. GMAC expects you to be able to arrive at this logic.

amirsaf1

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24 Jan 2023, 22:39

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KarishmaB

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Hi Karishma,

I get the logic. But then, how we interpret that drug companies already replaced the current drugs with higher priced drugs? Because answer choice A states that they concentrated on replacing the drugs. And I think here there is a need to see it from the drug companies POV. And maybe GMAC's common knowledge or logical thinking here is that any company always prioritize profit over anything. I am not sure how we can define it as "logic" or "common" here. I am not so sure how "common" is "common". For example, giving tips is common in USA, but not for other countries. However, I think that GMAT test takers need to learn what "common" is in the states. It is a blurry line between "common knowledge", "logical reasoning", and "convoluted story". I hope someone can really explain what we can consider belongs to any of these 3 categories.

Raman109

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Understanding the argument -
Problem - Expenditure rose
Goal - Curb the increase in Expenditure
Plan - The Ministry of Health prohibited drug manufacturers from raising their product prices

Paradox - The demand didn't increase, but expenditure still grew substantially.

How can revenue still grow if the demand does not increase and the price of those drugs doesn't increase? It means the drug manufacturers found a loophole. What loophole? Take a weird example - say, Azithromycin, which is an antibiotic, is a prescription drug. Say it costs $100 to insurance. The government said don't increase the price for Azithromycin. So what did the drug manufacturer do - they created "Pzithromycin" with the same salt and launched it for $300. Govt. did not stop Pzithromycin; they stopped Azithromycin from pricing increase.

Option Elimination -

(A) After price increases were prohibited, drug manufacturers concentrated on producing new medications to replace existing products. Exactly.

(B) The population of Voronia rose steadily throughout the period. - Per capita mentioned in the argument takes care of this. Distortion.

(C) Improvements in manufacturing processes enabled drug manufacturers to maintain high profit levels on drugs despite the price freeze. - We aren't concerned about manufacturing high-profit. We need to know why expenditures grew substantially even after Govt. took the required steps. This option is out of scope.

(D) In addition to imposing a price freeze, the government encouraged doctors to prescribe generic versions of common drugs instead of the more expensive brand-name versions. It worsens the paradox. The expenditures should decrease in that case and not increase. Opposite of what we are looking for.

(E) After price increases were prohibited, some foreign manufacturers of expensive drugs ceased marketing them in Voronia. It worsens the paradox. If an expensive one quit, the price should go down. Opposite of what we are looking for.

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(A) Correct Answer

"After price increases were prohibited, drug manufacturers concentrated on producing new medications to replace existing products."

Key insight: If drug companies introduced new (and possibly more expensive) medications, patients might switch to these newer drugs instead of the older, price-controlled ones.
Since new drugs are not subject to the price freeze (because they didn't exist before), they can be priced higher than the older ones.
This explains why per capita expenditure kept increasing, even though drug prices weren’t raised directly. ✅

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GMATNinja need your insights here please!
I was between A and B, but I eliminated A because it says, manufacturers concentrated on producing new medications to replace existing products - but we don't know whether they succeeded or the new medications are in the market. So, I eliminated it.

what is wrong in my understanding and also please explain why B is wrong

Thanks in advance,
Swetha Reddy

cialit0506

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I cannot get my head round the reasonings of the OA. No matter how I look at it, D seems the best answer. If D is true, wouldn’t per capita expenditure of drugs increase?

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For several years, per capita expenditure on prescription drugs in Voronia rose by fifteen percent or more annually. In order to curb these dramatic increases, the ministry of health prohibited drug manufacturers from raising any of their products' prices. Even though use of prescription drugs did not expand after this price freeze, per capita expenditure for prescription drugs continued to increase by a substantial percentage each year.

Which of the following, if true, most helps to explain why the ministry's action did not achieve its goal?

The puzzle is this: prices were frozen, and use did not increase, yet per capita spending still rose a lot. So the best explanation is that spending shifted to new, more expensive drugs whose prices were not covered by the freeze.

(A) After price increases were prohibited, drug manufacturers concentrated on producing new medications to replace existing products.

This is correct. If companies responded by replacing old drugs with new ones, then they could keep overall spending rising even without raising the prices of existing products and even without increased use.

(B) The population of Voronia rose steadily throughout the period.

This does not explain it. The passage is about per capita expenditure, so total population growth is irrelevant.

(C) Improvements in manufacturing processes enabled drug manufacturers to maintain high profit levels on drugs despite the price freeze.

This does not explain higher spending. It explains profits, not why consumers spent more per person.

(D) In addition to imposing a price freeze, the government encouraged doctors to prescribe generic versions of common drugs instead of the more expensive brand-name versions.

This would tend to reduce spending, not explain why it kept rising.

(E) After price increases were prohibited, some foreign manufacturers of expensive drugs ceased marketing them in Voronia.

This would also tend to reduce spending on expensive drugs, not increase it.

Answer: (A)

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