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# Resolve/explain

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Manager
Joined: 05 May 2005
Posts: 77

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22 Aug 2007, 19:03
The oil wells of Barlandia produced so much oil that the market was overwhelmed; consumption did not keep pace with production. As a result, oil prices fell. The government of Barlandia attempted to support oil prices through a subsidy scheme: oil producers who voluntarily limited the amount of oil they produced were compensated directly by the government up to a specified maximum payment.

The program instituted by the government of Barlandia, if successful, will not be a net cost to the government. Which of the following, if true, is the best basis for an explanation of how this could be true?

a) Depressed oil prices meant operating losses for oil producers, decreasing the income of oil producers, and thus decreasing the taxes paid to the government by oil producers.

b) Oil production in countries other than Barlandia declined in the same year that Barlandia's government instituted the compensatory scheme.

c) In the first quarter after Barlandia's government instituted the compensatory scheme, oil production declined 8 percent.

d) Because the government specified a maximum subsidy payment per oil producer, those producers with numerous wells in production received less support per well than those producers with fewer wells in production.

e) Oil producers desiring to qualify for the compensatory scheme could not continue to produce oil and simply withhold it from the market.

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Director
Joined: 03 May 2007
Posts: 867

Kudos [?]: 265 [0], given: 7

Schools: University of Chicago, Wharton School

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22 Aug 2007, 20:27
above720 wrote:
The oil wells of Barlandia produced so much oil that the market was overwhelmed; consumption did not keep pace with production. As a result, oil prices fell. The government of Barlandia attempted to support oil prices through a subsidy scheme: oil producers who voluntarily limited the amount of oil they produced were compensated directly by the government up to a specified maximum payment.

The program instituted by the government of Barlandia, if successful, will not be a net cost to the government. Which of the following, if true, is the best basis for an explanation of how this could be true?

a) Depressed oil prices meant operating losses for oil producers, decreasing the income of oil producers, and thus decreasing the taxes paid to the government by oil producers.

b) Oil production in countries other than Barlandia declined in the same year that Barlandia's government instituted the compensatory scheme.

c) In the first quarter after Barlandia's government instituted the compensatory scheme, oil production declined 8 percent.

d) Because the government specified a maximum subsidy payment per oil producer, those producers with numerous wells in production received less support per well than those producers with fewer wells in production.

e) Oil producers desiring to qualify for the compensatory scheme could not continue to produce oil and simply withhold it from the market.

D. not very much clear but should be D.

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VP
Joined: 10 Jun 2007
Posts: 1434

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22 Aug 2007, 20:31
above720 wrote:
The oil wells of Barlandia produced so much oil that the market was overwhelmed; consumption did not keep pace with production. As a result, oil prices fell. The government of Barlandia attempted to support oil prices through a subsidy scheme: oil producers who voluntarily limited the amount of oil they produced were compensated directly by the government up to a specified maximum payment.

The program instituted by the government of Barlandia, if successful, will not be a net cost to the government. Which of the following, if true, is the best basis for an explanation of how this could be true?

a) Depressed oil prices meant operating losses for oil producers, decreasing the income of oil producers, and thus decreasing the taxes paid to the government by oil producers.

b) Oil production in countries other than Barlandia declined in the same year that Barlandia's government instituted the compensatory scheme.

c) In the first quarter after Barlandia's government instituted the compensatory scheme, oil production declined 8 percent.

d) Because the government specified a maximum subsidy payment per oil producer, those producers with numerous wells in production received less support per well than those producers with fewer wells in production.

e) Oil producers desiring to qualify for the compensatory scheme could not continue to produce oil and simply withhold it from the market.

Clear A.

The argument is talking about government "net cost". If you look at the question, the answer should be that the government would have somehow get replacement for the money they spend.

In A, the government will get money back because they will get the tax from the oil producer's income.

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Intern
Joined: 29 Dec 2006
Posts: 45

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Location: Seoul

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23 Aug 2007, 05:47
Think this is the only argument that explains howgovernment will compensate for expances related to subsidies.
_________________

brainstorm

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Senior Manager
Joined: 03 Jun 2007
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24 Aug 2007, 10:30
D is better than A

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Intern
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24 Aug 2007, 11:27
Must be A

If government pays fixed amount to everyone than oilproducers with many oil wells is going to recieve less amount irrespective of their production capacity. So that tax will be less than whatever ideally the tax should have been generated,

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Manager
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24 Aug 2007, 14:15
A.

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Intern
Joined: 26 Jul 2011
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01 Oct 2014, 04:09
Hi Folks,

I am not very clear of the question(will not be a net cost to the government). Does this mean that if the program is successful, it will not have any additional cost burden to the Government?.

Choice A: Depressed oil prices meant operating losses for oil producers, decreasing the income of oil producers, and thus decreasing the taxes paid to the government by oil producers.

==>My understanding of this choice is that less tax is paid to the Government so this will result in additional cost burden to the Government. Then how come this choice is correct. Government gives compensation to the company but still less tax is paid to govt. by the company, so there is an overall loss for the Government.

Thanks,
Gabriel

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Manager
Joined: 02 Sep 2014
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Schools: Haas EWMBA '20
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06 Oct 2014, 23:56
gabriel87 wrote:
Hi Folks,

I am not very clear of the question(will not be a net cost to the government). Does this mean that if the program is successful, it will not have any additional cost burden to the Government?.

Choice A: Depressed oil prices meant operating losses for oil producers, decreasing the income of oil producers, and thus decreasing the taxes paid to the government by oil producers.

==>My understanding of this choice is that less tax is paid to the Government so this will result in additional cost burden to the Government. Then how come this choice is correct. Government gives compensation to the company but still less tax is paid to govt. by the company, so there is an overall loss for the Government.

Thanks,
Gabriel

Here is my understanding. I think A is correct answer.
Imagine initial scenario. High production--> low prices--> less tax. Govt losing money.
Govt pays money to reduce production--> lower production-->higher prices--> higher taxes. Govt can make some money it paid compared to initial scenario. So it is possible govt. paid X amount and money and recovered all of it -->zero net cost to it.

Kudos [?]: 237 [0], given: 32

Re: Resolve/explain   [#permalink] 06 Oct 2014, 23:56
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