The cotton farms of Country Q became so productive that the market

Question

The cotton farms of Country Q became so productive that the market could not absorb all that they produced. Consequently, cotton prices fell. The government tried to boost cotton prices by offering farmers who took 25 percent of their cotton acreage out of production direct support payments up to a specified maximum per farm.

The government's program, if successful, will not be a net burden on the budget. Which of the following, if true, is the basis for an explanation how this could be so?

(A) Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits.

(B) Cotton production in several countries other than Q declined slightly the year that support-payment program went into effect in Q.

(C) The first year that the support-payment program was in effect, cotton acreage in Q was 5% below its level in the base year for the program.

(D) The specified maximum per farm meant that for very large cotton farms the support payments were less per acre for those acres that were withdrawn from production than they were for smaller farms.

(E) Farmers who wished to qualify for support payments could not use the cotton acreage that was withdrawn from production to grow any other crop

GMATNinja · Accepted Answer

The conclusion is that "The government's program, if successful, will not be a net burden on the budget." Let's review what we have so far...

Cotton prices fell because there was too much cotton on the market. 
 The government wanted to boost cotton prices. How? By offering farmers incentive to take 25% of their cotton acreage out of production. 
 What is that incentive? If you take 25% of your cotton acreage out of production, then the government will give you "direct support payments up to a specified maximum per farm." So we don't know how much the farmers would get, but if they take away 25% of their cotton acreage, the government will give them some money. 
 For example, if you currently use 60 acres to grow cotton, the government will pay you to bring that amount down to 45 acres.

The goal of the program is to reduce the supply. The government hopes that reducing the supply will cause cotton prices to increase. This makes sense. If the cotton supply is sufficiently reduced, cotton prices should eventually go up.

But this plan has a cost. For every farm that reduces their cotton acreage by 25%, the government has to make a payment. Even if the plan successfully causes cotton prices to increase, it seems as though the government will be losing money by making all of those payments. If costs are increased and nothing else changes, the plan will be a net burden (i.e. cause a net loss) for the government.

The only way the government will NOT lose money is if the plan also somehow increases the government's revenue. If the increased revenue is at least as much as the increased costs, then the plan will NOT be a net burden.

Since the conclusion states that the plan will not be a net burden, let's look for something that could explain increased revenue IF the plan succeeds:

This is exactly what we need. With low cotton prices, the government's revenue from taxes is reduced. If the plan succeeds and prices go up, the government's revenue will also go up. So even though the plan will increase the government's costs, it should also increase its revenue.

Remember, we don't need to PROVE that the plan will succeed or PROVE that, if the plan succeeds, the increase in revenue will exceed the increase in costs. Choice (A) is the  basis  for a possible explanation, and that's good enough to answer the question. Keep (A).

This is evidence that the plan will have limited success the first year, but that's not what we're after. Even if the plan succeeds, the government's costs will go up as they make payments to the farms. We need something that could explain how the government might avoid a net loss despite these increased costs. Eliminate (B).

Again, this tells us that the plan had some success during the first year. As desired, cotton acreage was decreased. As explained for choice (B), we aren't looking for evidence that the plan will or will not succeed. IF the plan succeeds, how could the government avoid a net loss? That's what we need to explain, and (C) doesn't help. Eliminate (C).

Choice (D) suggests that smaller farms have a bit more incentive to accept the payments and reduce their cotton acreage than larger farmers. So (D) might be the basis for explaining why smaller farms are more likely to reduce their cotton acreage. This  could  explain why the plan might not achieve its goals.

But, again, we aren't looking for to explain whether the plan will or will not succeed. Choice (D) doesn't explain how the government can make up for the increased costs IF the plan succeeds, so eliminate (D).

This  might  be a reason why farmers would chose not to accept the payments and reduce their cotton acreage. Perhaps the farmers would have more incentive to reduce their cotton acreage if (E) were not true.

So, choice (E) could be the basis for explaining why the plan might fail. But, as explained in choice (D), this is not what we are trying to explain. Choice (E) does not help explain how the government could avoid a net loss, so (E) can be eliminated.

(A) is the best answer.

vivek123 · Answer

TeHCM,

Government is paying farmers who can take 25% of the production land out of production, so government is spending here, if there should be no burden on government, this money should come from somewhere.

So, if the prices of cotton go up, government will anyway get revenue from taxes & hence no burden.

'A' says, if cotton prices fall, there is no profit for farms, hence no tax revenue for government. So should be correct.

saransh · Answer

A it is . It shows a correlation how the increase in farm cotton prices will affect the government revenues. By decreasing the production the cotton prices will rise and thus the revenue , consequently making up for the deficit because of direct support programs.

~sara

gixxer1000 · Answer

This is a paradox question. How will the government provide payments to farmers to reduce their cotton production without reducing their budget. We have to figure out a way that the government can give money to the farmers and then make that money back so there is a net zero effect on the budget.

(A) Doesn't solve the paradox and actually widens it. The government loses money when it gives it to the farmers and then loses money again from the lost tax revenu.

(B) Irrelevant because it addresses production in countries other and country Q.

(C) Correct. This proves that the program works. If The program does reduce production then cotton prices will rise and the government will make up the difference from the payments through increased tax revenues from higher cotton prices.

(D) Irrelelevant. Size of farm makes no difference.

(E) Widens paradox like A becuase if the land is not used for anything else that results in reduced revenue and therefore reduced taxes for the government.

bkk145 · Answer

Gixxer, I don't agree that A widens paradox. Here is A:

(A) Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits.

The question is based on the assumption that the program will be successful. A successful program is when cotton prices is NOT depressed; thus, A talks about when the program is NOT successful.

gixxer1000 · Answer

I could see (A) being correct but not for the reason your saying.

(A) Depressed cotton prices  meant  operating losses for cotton farms, and the government lost revenue from taxes on farm profits.

This would mean that the government  was  losing tax money due to decreased cotton prices and if the program  is succesful  in increasing cotton prices tax revenues will now increase as well. But it is stated that the cotton prices were high, so that's a little confusing. I originally read "meant" as "means".

We are trying to solve the paradox of how the government will not lose money by giving money to farmers with the condition that the plan IS successful.

A successful program = low cotton prices. So how will low cotton prices increase revenues for the government enough to offset the payments to farmers? Sell more cotton at lower prices.

nusmavrik · Answer

Dissecting the argument into premises.
P1 : market could not absorb all that they produced
P2 : cotton prices fell
P3 : government tried to boost cotton prices
P4 : government’s program is NOT a burden on the budget(This is not actually a premise)

The government’s program, if successful, will not be a net burden on the budget. Which of the following, if 
true, is the best basis for an explanation of how this could be so?
(A) Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits.  >> So govt doesn't want to loose the revenue on the sales taxes. Makes sense to boost cotton prices. and explains WHY the program will NOT be a burden. Answer 
(B) Cotton production in several counties other than Q declined slightly the year that the support-payment program went into effect in Q.  >> Irrelevant. What happens in countries other than Q has no bearing 
(C) The first year that the support-payment program was in effect, cotton acreage in Q was 5% below its level in the base year for the program.  >> Irrelevant. How does this explain the govt intervention?? 
(D) The specified maximum per farm meant that for very large cotton farms the support payments were less per acre for those acres that were withdrawn from production than they were for smaller farms.  >> Take this pattern and write it. One of the favorite tricks of GMAT. When the stimulus doesn't even talk about the comparison, answer choice  links a comparison to the argument .

Payments for  Very large cotton farms Vs smaller farms  is Irrelevant and does NOT explain Govt intervention.
 
(E) Farmers who wished to qualify for support payments could not use the cotton acreage that was withdrawn from production to grow any other crop.  >> Grow any other crop????. Are you serious. Another way to digress. Be wary of scope shifts. We are ONLY concerned with cotton.

ellenhch · Answer

Question confused me for the longest time and after reading so many posts it didn't click for me until now.

What's confusing is that the gov't lost revenue from taxes on farm profits (answer choice A). I didn't see how losing revenue would help the net burden on the budget, but I realize this stmt in turn, will mean that when cotton prices increases, the gov't will receive more revenue from taxes on farm profits. I'm not negating the argument (which is the case for assumption questions), as this question is a "resolve the paradox" type of question, but instead if answer choice is true, that means when cotton price increases, so will gov't revenue.

pqhai · Answer

Hi ellenhch.

First of all,  this is strengthen question, not resolve the paradox.  The main conclusion is: "If the government’s program is successful, it will not be a net burden on the budget"
 What is the government's program?  <== This is the payment plan to support the farmers.

So I will "rewrite" the conclusion as following:
 Main conclusion:  The successful payment plan of government will not be a net burden of the budget. 
 Question:  Which of the following answer will best support this conclusion?

Okay, so you need to find an option that strengthen the point " a successful expense  will not be a burden of the Gov's budget". The logic for this kind of question is:
  Gov's NET INCOME = Gov's REVENUE - Gov'S EXPENSES

So you will think, "okay, Gov's net income will not decrease if":
 (1) No expenses 
--OR--
(2) Revenue comes from the expense will be larger then the expense itself.

A says:  Depressed cotton prices ==> losses for cotton farms ==> the government lost revenue from taxes on farm profits.

It says that if Gov does not pay "the Expense - Payment plan" ==> Gov will loss revenue for sure because of falling prices of cotton. So it would be better if Gov pay like 1 dollar first (payment plan), then Gov can earn 2 dollars (revenue from taxes) later. It's exact the logic in A.

Hope it clears.

PiyushK · Answer

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Amit1408GMAThunk · Answer

The cotton farms of Country Q became so productive that the market could not absorb all that they produced. Consequently, cotton prices fell. The government tried to boost cotton prices by offering farmers who took 25 percent of their cotton acreage out of production direct support payments up to a specified maximum per farm.

The government's program, if successful, will not be a net burden on the budget. Which of the following, if true, is the best basis for an explanation of how this could be so?

A. Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits.
B. Cotton production in several countries other than Q declined slightly the year that the support-payment program went into effect in Q. 
C. The first year that the support-payment program was in effect, cotton acreage in Q was 5% below its level in the base year for the program.
D. The specified maximum per farm meant that for very large cotton farms the support payments were less per acre for those acres that were withdrawn from production than they were for smaller farms.
E. Farmers who wished to qualify for support payments could not use the cotton acreage that was withdrawn from production to grow any other crop.

Well Option A is the best answer choice and the explanation goes as under:-

Option A:- This is the correct answer as it states that the current scenario i.e. depressed cotton prices itself is a big cost to the government and hence it has to fund
to the farmers to get them out of this situation.

Option B:- Does not affect the conclusion directly - 'The government's program, if successful, will not be a net burden on the budget'.

Option C:- Out of scope - Does not affect the conclusion at all as it is talking about the year after the government settles funds to the farmers.

Option D:- Out of scope - Does not affect the conclusion at all as the comparison is made between larger and smaller farms. This is a wishy-washy option running around the bush.

Option E:- Out of scope - Does not affect the conclusion. - If the withdrawn cotton accreage cannot be used for producing other crops, then it will indirectly affect the 
 country Q's GDP, hence can be a cost. So it somewhere weakens the conclusion as well.

Hope this explanation helps.

Thanks!

bb61 · Answer

the government offered farmers who took 25 percent of their cotton acreage out of production direct support payments up to a specified maximum per farm.
in order to indicate that these payments to farmers will not be a burden on budget, a correct answer choice should address monetary incentive of the government

A. Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits. 
B. Cotton production in several countries  other than Q  declined slightly the year that the support-payment program went into effect in Q. 
 out of scope... we strictly care about mentioned farmers within the country 
C. The first year that the support-payment program was in effect, cotton acreage in Q was 5% below its level in the base year for the program.
 out of scope.. the argument says the program if successful, will not be a burden.. so the first year is not a good measure 
D. The specified maximum per farm meant that for very large cotton farms the support payments were less per acre for those acres that were withdrawn from production than they were for smaller farms.
 the argument does not talk about the specifications of the program. 
E. Farmers who wished to qualify for support payments could not use the cotton acreage that was withdrawn from production  to grow any other crop .
 same as D

JarvisR · Answer

P1:The cotton farms of Country Q became so productive that the market could not absorb all that they produced. Consequently, cotton prices fell. 
P2:The government tried to boost cotton prices by offering farmers who took 25 percent of their cotton acreage out of production direct support payments up to a specified maximum per farm.

The government's program, if successful, will not be a net burden on the budget.
Which of the following, if true, is the best basis for an explanation of how this could be so?

OK, so the goverment is spending some money to boost the cotton prices.Now if some way , the govt gets that money back then the solution will not be a net burden.
Target would be to find an option which fill in this deficit ,due to outflow of money, with inflow in-form of tax etc.

A. Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits. 
>> Looks good.The government's program, if successful, will not be a net burden on the budget as it will be getting most of those money back in form of revenue.

B. Cotton production in several countries other than Q declined slightly the year that the support-payment program went into effect in Q. 
>> But how would this help govt to recoup the money spent.Also we are concerned abt the effect of plan in Q not in other countries.

C. The first year that the support-payment program was in effect, cotton acreage in Q was 5% below its level in the base year for the program.
>> This might help farmers but how would this help govt budget?

D. The specified maximum per farm meant that for very large cotton farms the support payments were less per acre for those acres that were withdrawn from production than they were for smaller farms.
>> Argument doesn't confirm this.Also doesn't give any info that how would this fill in govt losses.

E. Farmers who wished to qualify for support payments could not use the cotton acreage that was withdrawn from production to grow any other crop.
>> Same issue. Doesn't answer how this would help govt to meet its losses. Also affect of growing other crop on the mentioned problem is not clear.

LogicGuru1 · Answer

Quickly isolate the premise and conclusion in a simple language PREMISE 1 ) Country Q produced lots of cotton PREMISE 2 ) Price fell PREMISE 3 ) Government asked farmer to destroy 25 % crop PREMISE 4 ) Government said :- We will pay you money for the crop you will destroy. CONCLUSION ) Government scheme worked. The budget was not stressed and everyone lived happily ever after. :-D

Question :- Explain how the scheme worked? GIVE AN EXPLAINATION WHY BUDGET WAS NOT DISTURBED. EXPLAINATION :- 1)Government paid money to farmers for destroying crops. Government budget went into a deficit. Government lost money. (government sad

) 2) Crop was destroyed. Normal or high cotton prices were restored. Farmers started making profits (first from high price of cotton and second from the government money that was paid to destroy. Farmers very very happy

) 3) Then came the Income tax time. Farmers made lots of money. so they paid lots of income tax. Income tax to who- to the government. Money came back to governement. Budget was full again. Lost money was regained. Government also very happy

) NET EFFECT :- GOVERNMENT HAPPY, FARMER HAPPY, COTTON PRICE RESTORED TO NORMAL, BUDGET FULL. If Farmers do not make money they would have been in loss. Someone in loss do not pay income tax but rather ask the government for help. If the government did not paid money to destroy cotton, it would have lost not only the income tax from farmers but also later had to pay more money in forms of economic relief/aid/funds to distressed farmers. So by paying money to destroy crop the government actually made money. Meaning all of that happened because because cotton farmers made money. and then paid income tax. Income tax from farmers is important for budget. Cotton FARMS and cotton farmers should not go in LOSS EVER because then government will also go in loss by losing revenues from cotton operators. What Options says this (A) Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits. ANSWER IS A The cotton farms of Country Q became so productive that that market could not absorb all that they produced. Consequently, cotton prices fell. The government tried to boost cotton prices by offering farmers who took 25 percent of their cotton acreage out of production direct support payments up to a specified maximum per farm. The government's program, if successful, will not be a net burden on the budget. Which of the following, if true, is the basis for an explanation how this could be so? (A) Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits. (B) Cotton production in several countries other than Q declined slightly the year that support-payment program went into effect in Q. (C) The first year that the support-payment program was in effect, cotton acreage in Q was 5% below its level in the base year for the program. (D) The specified maximum per farm meant that for very large cotton farms the support payments were less per acre for those acres that were withdrawn from production than they were for smaller farms. (E) Farmers who wished to qualify for support payments could not use the cotton acreage that was withdrawn from production to grow any other crop

sandysilva · Answer

The cotton farms of Country Q became so productive that the market could not absorb all that they produced. Consequently, cotton prices fell. The government tried to boost cotton prices by offering farmers who took 25 percent of their cotton acreage out of production direct support payments up to a specified maximum per farm.

The government's program, if successful, will not be a net burden on the budget. Which of the following, if true, is the basis for an explanation how this could be so?

(A) Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits
 
IMO A. If government is successful in boosting cotton prices the income would come from farms in terms of taxes and therefore the losses from direct support payments would be nullified.

Engineer1 · Answer

@karishmaB @GMATGuruNY can you please explain how A is the correct answer? Thanks!

MartyMurray · Answer

GMAT Ninja's answer  here  explains pretty well why (A) is correct.

If you'd like to look at (A) in a different way, you could consider the following:

We need a choice that explains the following:

The government's program, if successful, will not be a net burden on the budget.

So, we need to explain how it could be that, even though the government will offer "direct support payments" to farmers, the program will not be a net burden on the budget.

This is a common type of GMAT scenario, one in which the outcome of use of a resource is not a net reduction in the availability of that resource.

In this case, (A) explains how it could be that the government will not experience a net reduction in money by showing that there will be an OFFSETTING EFFECT.

Here's (A):

(A) Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits.

(A) indicates that depressed cotton prices caused the government to lose tax revenue. Given that statement, we can presume that an increase in cotton prices will result in an increase in tax revenue.

An increase in tax revenue would offset the government's spending on "direct support payments."

So, we can see that, by boosting cotton prices by offering direct support payments to farmers who took 25 percent of their cotton acreage out of production, the government will increase tax revenue, and thus the program will pay for itself.

So, (A) explains why the program will not be a net burden on the budget.

Raman109 · Answer

Understanding the argument - 
The cotton farms of Country Q became so productive that the market could not absorb all that they produced. Fact 
Consequently, cotton prices fell. Fact. As supply rises, demand less. Lower price. 
The government tried to boost cotton prices by offering farmers who took 25 percent of their cotton acreage out of production direct support payments up to a specified maximum per farm. - So the cotton prices are lower, so the government tax is lower, and on top of that, the government is paying something to farmers to boost prices. So, in essence, the government cost burden is high? Yes. Where is the paradox?

Question stem - The government's program, if successful, will not be a net burden on the budget. Oh, I see. It says this'll not be a burden. That's the paradox.

A critical aspect of government spending is its interest in collecting higher taxes if the prices rise. So even after spending some money, it can still make a handsome net profit because of a boost in prices, and thus, it'll not be a burden.

Option Elimination -

(A) Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits. - Ok. So, increased prices mean more revenues for the government. Makes sense.

(B) Cotton production in several countries other than Q declined slightly the year that support-payment program went into effect in Q. - Our preview is government spending or making profits in country Q. Out of scope.

(C) The first year that the support-payment program was in effect, cotton acreage in Q was 5% below its level in the base year for the program. - It worsens the paradox. Ideally, if the government is paying to reduce the 25% of land and it only reduces by 5%, then the prices may not rise much or not at all, and subsequently, the government may not make enough money to recover the cost. Opposite of what we need.

(D) The specified maximum per farm meant that for very large cotton farms the support payments were less per acre for those acres that were withdrawn from production than they were for smaller farms. - Out of scope.

(E) Farmers who wished to qualify for support payments could not use the cotton acreage that was withdrawn from production to grow any other crop - out of scope.

Kavicogsci · Answer

This is fantastic example on why we need to 'keep eyes on the prize' aka the actual conclusion around which the Q stem is centered
B&C give reasons of why the plan might be success (Pls read gmat Ninja's reasoning)
D&E give reasons why the plan might be failure (Pls read gmat Ninja's reasoning)

But we need none because the passage adds a beautiful line  "will not be a net burden on the budget"  is basis for an  " explanation"  is all we need to be focused on. If the phrase - 'will not be a net burden on the budget' wasn't there this would be a Q that was merely talking about the plan fail/success but the additional conditionality is what shifts the focus and that's why reading Q stem is as important as the prompt.

The cotton farms of Country Q became so productive that the market

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The cotton farms of Country Q became so productive that the market

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