One Passage - Two Questions When a subscriber of one telecom

Hi,

Here are the solutions along with detailed explanations. Hope you enjoy and learn

Understanding the Passage:

Conclusion: The regulator should increase the connection fee so that the financials of the new telecom operators improve and thereby, they are able to better compete in the market.

Premises:

1. Connection fee is one of the sources of revenue for new companies
2. In Country Y, this connection fee, which is charged on a per minute basis, is stipulated by the regulator and thus, is same for every telecom operator.

Background Information:

Definition of connection fee:
When a subscriber of one telecom operator calls another subscriber of different telecom operator, the destination telecom company (of the receiving subscriber) charges a small connection fee to the originating telecom operator

Existing Market conditions:
1. Recently, in country Y, several new telecom operators have entered the market
2. Almost all of them are enticing customers by charging much lower call rates than are charged by the existing operators

We can see that the conclusion as stated above is not just a recommendation but also provides reasons to support the recommendation. So, separating the reasons (or the premises) and the recommendation, we have the final structure of the argument as:

Conclusion: The regulator should increase the connection fee

Premises:

1. Increasing the connection fee will improve the financials of the new operators
2. Connection fee is one of the sources of revenue for new companies
3. In Country Y, this connection fee, which is charged on a per minute basis, is stipulated by the regulator and thus, is same for every telecom operator.
4. Improved financials will help new telecom operators to better compete in the market

Now, with this understanding of the passage, let’s move on to the questions:

Question 1:

In this question, we need to find a reason which suggests that the recommendation of the author would have the opposite effect than as envisaged.

Pre-thinking:

Any statement that suggests that increasing the connection fee will deteriorate (opposite of improve) the financials of the new telecom operators, could be an answer to this question.

Let’s think of one instance each where each of the above could happen:

Increasing the connection fee will deteriorate the financials if it increases the net outflow of money from the new telecom companies. Since as per the definition of connection fee, this is the charge paid when a telecom subscriber calls another telecom subscriber of different company, more the number of outgoing calls (to other companies) from a telecom company, more is the outflow of funds.

So, if a telecom company has users who make more outgoing calls than the number of incoming calls, the company will have to shell out more money, in case of increase in connection fee.

Analysis of Answer Choices:

Now, let’s look at each of the answer choices:

A. The connection fee is such a small component of revenues of any telecom companies that no company could survive by just relying on this. – This doesn’t suggest that an increase in connection fee will have a negative effect. It can only imply that an increase or decrease in connection fee might not have much effect on the financials since it is such a small component of revenues. Therefore, this is not the correct choice.

B. In the past, whenever regulator has been advised a course of action by an outside agency, the regulator has taken a completely opposite action step. – This is completely out of scope. The question stem is talking about a situation only when the recommendation is implemented; if the regulator does something opposite, it is not relevant to the question. Besides, this option statement is talking about a past trend; not something which is going to happen this time. Thus, Incorrect.

C. The financial health of a telecom company is determined by the total profits generated by the company, irrespective of the source of revenues. – Very similar to option A. It doesn’t suggest that an increase in connection fee will have negative impact on financials. Therefore, Incorrect.

D. Due to highly competitive call rates, the number of outgoing calls from an average user of a new telecom company is expected to be much greater than the number of incoming calls. – This is similar to our pre-thinking answer. If the number of outgoing calls is expected to be greater than the number of incoming calls, increasing the connection fee will increase the losses of the new telecom companies and thus will negatively impact their financial health. Therefore, this could be an answer. For complete surety, let’s also look at the remaining option choice.

E. Increase in the connection fee may be passed on by the companies to the end users, which may make consumers switch their existing telecom company. – Would all companies pass on the increase in costs to the customers or only the existing companies? If all the companies pass on their costs, it may not have any impact on the new companies; if any, it could have a positive impact on new companies since they have fewer customers who could shift.

So, the answer to this question is Option D.

Question 2:

In this question, we need to find out the assumption made by author.

To begin with, let’s bring our argument structure here:

Conclusion: the regulator should increase the connection fee

Premises:

1. Increasing the connection fee will improve the financials of the new operators
2. Connection fee is one of the sources of revenue for new companies
3. In Country Y, this connection fee, which is charged on a per minute basis, is stipulated by the regulator and thus, is same for every telecom operator.
4. Improved financials will help new telecom operators to better compete in the market

The main conclusion is the one stated above. However, if you look carefully, there are two intermediate conclusions made by the author in arriving at the main conclusion.

Intermediate Conclusions:

The two intermediate conclusions are:
1. Increasing the connection fee will improve the financials of the new operators
2. Improved financials will help new telecom operators to better compete in the market

These two conclusions don’t have any premises as such; they are in the form of “if-then” type conclusions.
1. The first conclusion can be written as – If the connection fee is increased, then financials of the new telecom operators would improve
2. The second conclusion can be written as – If the financials of the new telecom operators improve, then they will be able to better compete in the market.

Now, the question asks us to find an assumption made by the author. In this case, there are assumptions made by the author for arriving at each of these three conclusions and the correct answer choice could be from any of these assumptions.

Prethinking:

Let’s prethink one assumption each for each of the three conclusions:

1. Conclusion: the regulator should increase the connection fee
Assumption: Regulator should take steps which increase competitiveness in the market.

2. Conclusion: If the connection fee is increased, financials of the new telecom operators would improve
Assumption: Number of minutes of incoming calls is greater than the number of minutes of outgoing calls, for the new telecom operators

3. Conclusion: If the financials of the new telecom operators improve, then they will be able to better compete in the market
Assumption: Given financials of the new telecom companies limit their ability to compete in the market.

So, here, we have found out three assumptions, all of which are valid.

It’s important to note here that the idea of doing pre-thinking is not to get at the right answer but to assimilate all the information in the passage. (However, it has been observed that with practice, one can pre-think answers majority of the times)

Analysis of Answer Choices:

Now, let’s look at the option statements:

A. The regulator will most probably agree with the author’s recommended course of action – This is out of scope. Even though the author is making a recommendation, it is not suggested in the passage that the recommendation will necessarily be implemented. Thus, Incorrect.

B. To improve the financials of the new companies, all the possible sources of revenues should be utilized in the best manner possible. – It is too general in nature – “all the possible sources of revenues should be utilized in the best manner possible”. Even though the author is making a recommendation about one source of revenue for the new companies, the given assumption is not required. Thus, Incorrect.

C. One of the goals of the regulator is to make the telecom market highly competitive, which will ensure consumer welfare – This is close to our first prethought assumption; however, it says that the goal is to make market “highly competitive”. “High competition” does not necessarily be the goal; just an increase over the current competition is needed as a goal to justify the author’s recommendation. Thus, this statement is not a “must be true” statement for the conclusion to hold. Therefore, this is not an assumption.

D. Weak financials is one of the reasons which restrict the ability of the new companies to compete in the market. – This is the same assumption arrived for the third conclusion. This is necessary for the third conclusion to hold. If weak financials doesn’t restrict the ability of new companies to compete in the market, improving the financials will not help them to compete better in the market. Therefore, the third conclusion will not hold in the absence of this statement. Therefore, this is a “must be true” statement for the conclusion to hold. Thus, this is the answer choice.

E. New companies will not have to pay increased connection fee to the existing companies. – This is against the information given in the passage. The passage says that each company needs to pay the same connection fee. Therefore, Incorrect.

So, the answer to this question is Option D.

I hope the explanations help in understanding the correct as well as incorrect answer choices.

Let me know if any further clarity is needed.

Thanks
Chiranjeev
_________________

For Q1. D, below is the explanation

Assumption :- The author assumes that the new companies will receive more no of incoming calls than outgoing calls. If the situation is reversed then the new companies will loose revenues.

POE

A. even though connection fee is a small component, an increase will definitely increase the revenue for the company
B. Regulators action in the past is not in the scope of the passage
C. Passage does not mention anything about other components other than revenue from connection fee
D. Similar to what is mentioned in assumption - Correct
E. Increase in the connection fee will be same for all companies, regardless of new or existing. so even with passing the increased costs to the end users, the prices offered by the new companies will still be lower than existing companies


For Q2. D, below is the explanation

Assumption :- increased financial health will make the company competitive. so the author assumes that one of the parameters that hinders the new company from being competitive is the financial health

A. Regulator`s response to the proposal is not in the scope of the argument
B. we are considering only 1 source of revenue - connection fee
c. Goals of the regulator not mentioned - but even if we assume this were to be true then increase in the connection fee might have a reverse effect of price increase for end users
D. restatement of assumption - Correct
E. All the companies have to pay same connection fee.

1.
A weakens author's position, but doesn't say anything about the negative effect. B and C are irrelevant. D, points to the fact that the very attractive call rates of new companies would result in high outgoing calls and may result in additional financial benefit if the interconnection fee is increased. E, indicates that when interconnection charges are increased, they may be passed on to the consumers, and for new companies, this would mean, negation of the very sales pitch they are hoping to acquire new customers with. So, E is correct.


2. A is incorrect because there is no description of author-regulator relationship.
B is an objective, but it's more of a telecom company than the regulator... thus incorrect.
C looks good, possibly one reason why regulator would want good financial health of new entrants in the market
D talks about companies entering the market, not the new players who are already in market.. incorrect.
E may not matter if interconnection fee forms very small part of a company's financials.

So, C is correct.

Quite interesting! Two replies with different answer choices for each of the two options.

We are waiting for some more responses before we put up official answers along with explanations.

Cheers
Chiranjeev
_________________

When a subscriber of one telecom operator calls another subscriber of different telecom operator, the destination telecom company (of the receiving subscriber) charges a small connection fee to the originating telecom operator. In Country Y, this connection fee, which is charged on a per minute basis, is stipulated by the regulator and thus, is same for every telecom operator.

Recently, in country Y, several new telecom operators have entered the market and almost all of them are enticing customers by charging much lower call rates than are charged by the existing operators. Since connection fee is one of the sources of revenue for new companies, the regulator should increase the connection fee so that the financials of the new telecom operators improve and thereby, they are able to better compete in the market.

Conclusion: increasing the connection fee will improve the financials of new telecom entrants and will help them to compete with existing operators.

1.Select a statement below which provides the strongest reason to suggest that the recommendation of the author would have the opposite effect than as envisaged.
(find the AC that provides the strongest reason that increasing connection fee will not help entrants to compete)
A. The connection fee is such a small component of revenues of any telecom companies that no company could survive by just relying on this. Incorrect - Although connection fee is a only a small component of revenue, but it might still help in some way to improve financials and thus stay in competition
B. In the past, whenever regulator has been advised a course of action by an outside agency, the regulator has taken a completely opposite action step. Incorrect
C. The financial health of a telecom company is determined by the total profits generated by the company, irrespective of the source of revenues. Incorrect
D. Due to highly competitive call rates, the number of outgoing calls from an average user of a new telecom company is expected to be much greater than the number of incoming calls. correct -new companies will end up paying more as connections fees, thus loose money
E. Increase in the connection fee may be passed on by the companies to the end users, which may make consumers switch their existing telecom company. Inorrect

Q1 D.

Current situation (example)
Payout =1$ per call :: Avg outgoing calls =10 (or X) :: Avg incoming calls =10 (or Y)
Net Revenue =0 or (Y-X)*1

Now let's say the author recommended a payout of $2 per call
and Option D suggests X>Y. So, net revenue = (Y-X)*2 = (negative quantity)*2.

This situation will result in a net negative income for the new operators. Therefore, it hurts the newcomers instead of helping them better compete


Q2 D

Negate this answer choice. It will clearly weaken the stated conclusion. Therefore, it is the correct option.

Cheers

When a subscriber of one telecom operator calls another subscriber of different telecom operator, the destination telecom company (of the receiving subscriber) charges a small connection fee to the originating telecom operator. In Country Y, this connection fee, which is charged on a per minute basis, is stipulated by the regulator and thus, is same for every telecom operator.

Recently, in country Y, several new telecom operators have entered the market and almost all of them are enticing customers by charging much lower call rates than are charged by the existing operators. Since connection fee is one of the sources of revenue for new companies, the regulator should increase the connection fee so that the financials of the new telecom operators improve and thereby, they are able to better compete in the market.

Conclusion: The regulator should increase the connection fee so that new telecom operators improve can improve their financials and better compete in the market.

1. Select a statement below which provides the strongest reason to suggest that the recommendation of the author would have the opposite effect than as envisaged.
A. The connection fee is such a small component of revenues of any telecom companies that no company could survive by just relying on this.
-- This choice, though weakens the conclusion, is not strong contender for the "opposite" effect (compared to choice (D)).
B. In the past, whenever regulator has been advised a course of action by an outside agency, the regulator has taken a completely opposite action step.
-- Irrelevant to the argument/conclusion.
C. The financial health of a telecom company is determined by the total profits generated by the company, irrespective of the source of revenues.
-- Out of scope
D. Due to highly competitive call rates, the number of outgoing calls from an average user of a new telecom company is expected to be much greater than the number of incoming calls.
-- This choice shows the "opposite" effect. If new company has more outgoing calls than incoming calls, it will end up paying more connection fee once the fee is raised by regulators, and hence will not be able to compete effectively.
E. Increase in the connection fee may be passed on by the companies to the end users, which may make consumers switch their existing telecom company.[/align]
-- Irrelevant to the argument/conclusion.

Choice (D) should be the correct answer.



2. Which of the following statements is an assumption made by the author?
A. The regulator will most probably agree with the author’s recommended course of action
-- Irrelevant. Author does not assume this for his conclusion.
B. To improve the financials of the new companies, all the possible sources of revenues should be utilized in the best manner possible.
-- Out of scope. Does not address the conclusion and its underlying assumption.
C. One of the goals of the regulator is to make the telecom market highly competitive, which will ensure consumer welfare
-- This states exactly opposite than whats mentioned in the argument. Author recommendation favors the companies not consumer (as fees may be increased)
D. Weak financials is one of the reasons which restrict the ability of the new companies to compete in the market.
-- Correct. This is the assumption which stands the basis for author's conclusion " The regulator should increase the connection fee so that new telecom operators improve can improve their financials and better compete in the market". If you NEGATE this choice, it breaks down the conclusion.
E. New companies will not have to pay increased connection fee to the existing companies.
-- This goes beyond the scope of this argument.

Choice (D) should be the correct answer.

Conclusion: increasing the connection fee will improve the financials of new telecom entrants and will help them to compete with existing operators.
prephrase: improving financials will certainly help operators to stay in competition

2.Which of the following statements is an assumption made by the author?

A. The regulator will most probably agree with the author’s recommended course of action incorrect - irrelevant with respect to conclusion
B. To improve the financials of the new companies, all the possible sources of revenues should be utilized in the best manner possible. OOS
C. One of the goals of the regulator is to make the telecom market highly competitive, which will ensure consumer welfare goal of regulator is irrelevant to whether the recommendation will succeed
D. Weak financials is one of the reasons which restrict the ability of the new companies to compete in the market.
negate - weak financials is not one of the reasons which restrict the ability of the new companies to compete in the market. - good enough to destroy the argument
E. New companies will not have to pay increased connection fee to the existing companies. irrelevant

Good questions e-Gmat. Thanks and +1 to you.

1st Question: Answer D

POE:
A)This choice at the most suggests that the financials of the new telecom operators will not improve but it provides no reason that the financials would worsen.
B)Irrelevant
C)Again we are not refuting the claim that the financials would worsen if the connection fee were increased.
D)This choice correctly suggests the reason that the financials of the new operators would deteriorate rather than improve.
E)This choice at the most suggests that the financials of the new telecom operators will not improve but it provides no reason that the financials would worsen.

2nd question:Answer D

POE
A)Nothing as such is necessary or even hinted
B)Nothing as such is necessary or even hinted
C)No goals are dicussed
D) This is correct because the conclusion is that if the connection fee is increased the financials of new operators would improve and thereby they would be able to compete better. So weak financials has to be one of the reasons for not being able to compete.
E)Irrelevant

Q1 D
The competitiveness of new companies depends on fees flowing in on account of incoming calls , in case trend reverses plan of regulatory authority will not get realized

Q2 D

The financials of new companies need to be strong in order to help them compete in market .
Hence this one serves as the assumption .

ans
1. D.Due to highly competitive call rates, the number of outgoing calls from an average user of a new telecom company is expected to be much greater than the number of incoming calls.
2. E.New companies will not have to pay increased connection fee to the existing companies

Very useful participation from all the members! Kudos to all who answered both the questions correctly

The correct choice for both the questions is D. We'll be posting detailed solutions in some time.

Thanks,
Chiranjeev
_________________

Hi Navinag,

A good attempt. Your explanations for rejecting options A, B and C in Question 1 are correct. However, in case of option D, if the number of outgoing calls are more, then increasing the connection fee would further dent the financials of the new companies. This is because they need to pay other companies for every minute of outgoing call. In case of option E, please refer to the detailed explanation and feel free to ask in case of further doubts.

For 2nd question, in case of option D, we are not only talking about companies entering the market. We are talking about "new companies", the same term used in the passage. For option C, read the detailed solution to understand the reason for its rejection.

I appreciate your efforts that you put explanations for choosing your answers. It not only helps you understand better, it also helps the fellow community.

Feel free to ask in case of anything

Thanks
Chiranjeev
_________________

Hi Shyam,

Your solution to the first question is correct.

However, solution to the 2nd question cannot be option E since this option statement presents an information which is against the information given in the passage. The passage clearly states that all the telecom players need to pay the same connection fee.

Have a look at the detailed solutions posted above. Probably they would be helpful

Thanks,
Chiranjeev
_________________

In Country Y, this connection fee, which is charged on a per minute basis, is stipulated by the regulator and thus, is same for every telecom operator.

The above sentence states that irrespective of whether it is incoming or outgoing, the connection fee is same for every telecom operator. Given a condition like this, how is it going to yield them more money on outgoing calls? Am I missing something?

Hi Sharmila,

Refer to the first sentence: "When a subscriber of one telecom operator calls another subscriber of different telecom operator, the destination telecom company (of the receiving subscriber) charges a small connection fee to the originating telecom operator".

It means that connection fee is revenue for a telecom operator receiving the call and cost for a telecom operator originating the call.

Does it address your doubt?

Thanks,
Chiranjeev
_________________

The answer should be 'E'

This option states that the author is assuming that the new operators will not have to pay the increased connection fees to other operators. Which means, that the author is assuming that the new operators will have more incoming connection than outgoing connections.
This is not true. because the new operator might have higher outgoing calls resulting in it paying more connection fees.

Am i right??

Correct : D. Due to highly competitive call rates, the number of outgoing calls from an average user of a new telecom company is expected to be much greater than the number of incoming calls.

AS MER MY UNDERSTANDING : if no. of outgoing calls will be higher by customers of new companies then fee will paid by new companies to existing companies which will further lower their revenues, rather increase.