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The diamond mines of Extopia produced so many diamonds that the market

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The diamond mines of Extopia produced so many diamonds that the market [#permalink]

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New post 09 May 2017, 12:27
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Difficulty:

  45% (medium)

Question Stats:

63% (01:44) correct 37% (01:58) wrong based on 128 sessions

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The diamond mines of Extopia produced so many diamonds that the market was overwhelmed; consumption did not keep pace with production. As a result, diamond prices fell. The government of Extopia attempted to support diamond prices through a subsidy scheme: Diamond producers who voluntarily limited the number of diamonds they produced were compensated directly by the government up to a specified maximum payment.

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

A. Depressed diamond prices meant operating losses for diamond producers, decreasing the income of diamond producers, and thus decreasing the taxes paid to the government by diamond producers.
B. Diamond production in countries other than Extopia declined in the same year Extopia’s government instituted the compensatory scheme.
C. In the first quarter after Extopia’s government instituted the compensatory scheme, diamond production declined 8 percent.
D. Because the government specified a maximum subsidy payment per diamond producer, those producers with numerous mines in operation received less support per mine than those producers with fewer mines in operation.
E. Diamond producers desiring to qualify for the compensatory scheme could not continue to produce diamonds and simply withhold them from the market.

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Re: The diamond mines of Extopia produced so many diamonds that the market [#permalink]

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New post 10 May 2017, 06:37
SajjadAhmad wrote:
The diamond mines of Extopia produced so many diamonds that the market was overwhelmed; consumption did not keep pace with production. As a result, diamond prices fell. The government of Extopia attempted to support diamond prices through a subsidy scheme: Diamond producers who voluntarily limited the number of diamonds they produced were compensated directly by the government up to a specified maximum payment.

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

A. Depressed diamond prices meant operating losses for diamond producers, decreasing the income of diamond producers, and thus decreasing the taxes paid to the government by diamond producers.
B. Diamond production in countries other than Extopia declined in the same year Extopia’s government instituted the compensatory scheme.
C. In the first quarter after Extopia’s government instituted the compensatory scheme, diamond production declined 8 percent.
D. Because the government specified a maximum subsidy payment per diamond producer, those producers with numerous mines in operation received less support per mine than those producers with fewer mines in operation.
E. Diamond producers desiring to qualify for the compensatory scheme could not continue to produce diamonds and simply withhold them from the market.


Only (A) can be used to explain why the government doesn't face with a net cost increase,even though it sponsors for the subsidy.
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Re: The diamond mines of Extopia produced so many diamonds that the market [#permalink]

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New post 16 May 2017, 08:32
SajjadAhmad wrote:
The diamond mines of Extopia produced so many diamonds that the market was overwhelmed; consumption did not keep pace with production. As a result, diamond prices fell. The government of Extopia attempted to support diamond prices through a subsidy scheme: Diamond producers who voluntarily limited the number of diamonds they produced were compensated directly by the government up to a specified maximum payment.
The program instituted by the government of Extopia, if successful, will not result in a net cost increase to the government.

Which of the following, if true, is the best basis for an explanation of how this could be true?

A. Depressed diamond prices meant operating losses for diamond producers, decreasing the income of diamond producers, and thus decreasing the taxes paid to the government by diamond producers.
B. Diamond production in countries other than Extopia declined in the same year Extopia’s government instituted the compensatory scheme.
C. In the first quarter after Extopia’s government instituted the compensatory scheme, diamond production declined 8 percent.
D. Because the government specified a maximum subsidy payment per diamond producer, those producers with numerous mines in operation received less support per mine than those producers with fewer mines in operation.
E. Diamond producers desiring to qualify for the compensatory scheme could not continue to produce diamonds and simply withhold them from the market.


A - Govt. helps w/ diamond prices -> reduces op losses -> producers able to pay more taxes to the govt. (Only this helps answer the question)

B - How are other countries relevant to Extopia? -> Irrelevant
C - First Q, production down by 8% -> Great, maybe the subsidy worked and incentivised producers, but what about net cost? no info.
D - More mines, Less support from govt. than pdrcs with less mines -> doesn't justify how net cost is 0.
E - Subsidy = control production but producers aren't able to sustain -> this doesn't really help the argument.

This is what I gathered from the argument. Hope it helps.
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Re: The diamond mines of Extopia produced so many diamonds that the market [#permalink]

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New post 16 May 2017, 20:46
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We have been asked to explain a paradox --

1. government subsidy scheme - Diamond producers who voluntarily limited the number of diamonds they produced were compensated directly by the government
2. subsidy scheme will not result in a net cost to the government

the point #2 is surprising given point #1. We have been asked to explain point #2.

let us take a look at the answer options --

Option A - Correct answer

Subsidy scheme requires producers to cut supply, which in turn increases prices. This means that diamond producers can cut losses and hence pay more taxes to the government.

Other answer options


None of the other answer options explain why point #2 should be true. None of them talk about costs to the government.
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Re: The diamond mines of Extopia produced so many diamonds that the market   [#permalink] 16 May 2017, 20:46
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The diamond mines of Extopia produced so many diamonds that the market

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