rahulkashyap wrote:
chetan2u could you pls explain the answer using numbers? Thank you
Suppose company Ez is a car manufacturer in country Z. It manufactures and exports cars. In order to manufacture cars, Ez requires gear boxes. It used to import gearbox from a company Ey, which is in country Y, for a cost of C1 (10) per gearbox.
The total cost for producing a car was C (100) = C1 (10) + C2 (90), where C2 = all costs other than the cost of gear box.
The selling price for the car was S (105) and hence company Ez used to make a profit of S-C (105-100= 5).
Now the law prohibited import, hence company Ez is now compelled to buy gear boxes from a local company Fz ( a "fledging company" whom the government is supporting) at higher cost of C1 + d (10+ 6 = 16)
Now the total cost of producing a car becomes Ch = C1 +d + C2 (16 + 90 = 106)
Now profit is S - C1-d-C2 (105 - 106 = -1, negative)
Now option A states "Profit margins in those industries were not high enough to absorb the rise in costs mentioned above.", i.e. S - C1 - C2 (5 ) is not enough that the rise in cost d (6) can be observed. In other words,
S-C1-C2 (5) is not high enough that further subtracting d (6) from the profit would result in a positive profit. i.e.
S-C1-C2-d < 0 (5-6<0)
or S-C1-C2 < d (5<6)