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