As the US increased the production of natural gas

Question

As the US increased the production of natural gas released from underground shale formations, creating more output of polyethylene, it was expected that makers of plastic products such as plastic trash bags, toys, containers etc., which use polyethylene as a raw material, would benefit from the same as a result of the decrease in the price of natural gas. However, makers of plastic products have instead reported no cost benefit as a result of the increase in the supply of natural gas.

Which of the following, if true, most explains the zero cost benefit as reported by the makers of plastic products mentioned in the above argument?

A: To discourage people from using plastic products, many countries have started levying heavy taxes on the plastic industry as a measure to increase the cost of production and the resultant price of plastic products.

B: The price of ethane, a component of natural gas and raw material for polyethylene has decreased due to the increased supply of natural gas.

C: The makers of polyethylene have increased their profit margins and hence are not passing on lower cost benefits to their customers.

D: It is predicted that plastic manufacturers will eventually realize cost benefits, once the production of natural gas is further ramped up.

E: Since the production of natural gas released from shale formation has increased, the demand for plastic products has decreased significantly.

Explanations please... Thanks

hellosanthosh2k2 · Accepted Answer

one simple reason to eliminate option (A).

Premise states that  US  increased natural gas production.

Option (A) says  many countries ..... but is US included in many countries? May be or May be not. sufficient room for ambuiguity

GMATAspirer09 · Answer

The makers of plastic products use polyethylene as a raw material and makers of polyethylene are dependent on natural gas for production of polyethylene.
If the gas production increases and consequently it becomes cheap, then makers of polyethylene benefit from the same.
Now, if these makers increase their profit and do not pass on the benefit to makers of plastic products, their customers, then production of plastic products won't become cheap.

Hope this clears!

Hence, the answer is C

bkpolymers1617 · Answer

can you please explain why is a wrong? I find this option very subtle. On thing to note here is that option a talks about users, so even if there is a high tax being levied on the polythelene, the makers of plastic product will also increase the price i.e they will also add their fair share of tax. So there is nothing that actually undermines the cost benefit directly. So i eliminated this option. Is this reasoning correct? C on the other hand was very direct. thanks

arvind910619 · Answer

Hi,
I am perplexed by this question .
Zero cost saving is for the producers not for consumers i think then how come c is right .
Am i correct ?
Can some explain why is C correct and A wrong.

Leo8 · Answer

As the US increased the production of natural gas released from underground shale formations, creating more output of polyethylene, it was expected that makers of plastic products such as plastic trash bags, toys, containers etc., which use polyethylene as a raw material, would benefit from the same as a result of the decrease in the price of natural gas.

Conclusion :However, makers of plastic products have instead reported no cost benefit as a   result of the increase in the supply of natural gas.

We must focus on the question we have been asked for?

Question is very direct and specific about the effect of increased in the supply of natural gas on makers of plastic.

Option A: To discourage people from using plastic products, many countries have started levying heavy taxes on the plastic industry as a measure to increase the cost of production and the resultant price of plastic products.

This one speaks about the applying high taxes on plastic industry. So makers can still add another component in the retail price of the plastic bags, toys and containers in order to compensate the high tax they paid to government. This option however does not relate the effect of increase in production of natural gas to their profits.
Moreover, this option gives another incentive to makers of plastic to increase the prices of plastic items which can or cannot increase its profit margin.
 
On the other hand Option C hits the middle man.

C: The makers of polyethylene have increased their profit margins and hence are not passing on lower cost benefits to their customers.

Natural gas --> polyethylene -> plastic items.
Increase in production of natural gas means more polyethylene , more polyethylene means more plastic items.

but what if the polyethylene is still selling at the usual price - makers of plastic can not increase their profit on their usual price.

lovenish · Answer

The answer is C.

The line of reasoning goes 
1. The maker of Polyethylene is making profit margins means they are charging more for the same polyethylene than they were charging before when the production was low.
2. the makers of plastic products are the customers to the makers of polyethylene(who are getting polyethylene as a by product of natural gas extraction).

since the makers of plastic products have to bear the extra cost( due to the profit margins of polyethylene makers ) they are not able to reduce the cost despite the availability of polyethylene in large amount.

Do not get confused by the word "customer" it is used for maker of plastic products and not for user of plastic products.

Smokeybear00 · Answer

I think the confusion on this one, at least for me, was that the drillers who extract the polyethylene out of the ground are called "makers" (Oil and gas drillers don't make anything, they aren't manufacturers, they extract resources). Thus, I got them confused with the makers of plastic products and wrongly eliminated C.

aaba · Answer

In A, increase in cost as a result of increase in tax does not make sure the profit will diminish. On the other hand, C states clearly that plastic companies will accept lower cost benefits (or profits in short)

Give me kudos if my post helps.

thangvietnam · Answer

i dont like this problem .
choice c contradict the evidence that there is no cost benifit. this mean there is no increased profit margin.

Missyy · Answer

I held A and C at first. When look at the two options a bit closer, A is talking about tax impact whereas the conclusion is '...no cost benefit  as a result of  the increase in the supply of natural gas'. So A is kind of irrelevant, it doesn't explain why increased gas supply did not make the plastic items production cheaper. So I went with C.

kushipk10 · Answer

Hi ,

I know many stumbled between choices A & C.
Let me explain you my reasoning, keeping it simple.

Conclusion says : the makers of plastic products reported zero cost benefit , in spite of increase in production of Natural gas, and reduction in price of Natural gas.
Which means in simple words : zero cost benefit --> no benefit in the production of plastic products even though the indirect raw material price got reduced.

Option A: This speaks about increased tax effects 1) increased cost of production , and which results in 2) increased selling price of plastic products. Which means this option explains the effect of increased taxes, but not the effect of price reduction of Natural gas.

Option C: This speaks about effect of Natural gas price reduction. Ideal expectation is as price of raw material reduces then cost of production of plastic products will reduce, but because of intermediate raw material producers have increased their profit margin, the end producers of plastic didnt get the fruits of reduced price of Natural gas.

Hope the above explanation make things clear

RusskiyLev · Answer

Please could someone explain why answer choice E is incorrect?

lostin · Answer

E: Since the production of natural gas released from shale formation has increased, the demand for plastic products has decreased significantly.

Choice E talks about reduced plastic product demand but the stem is concern about zero cost benefit as reported by the makers of plastic products due to increased output of polyethylene.

So even if demand has reduced , plastic industries can buy cheaper polyethylene and get benefit from it..

Option E is just a trap choice.

TarPhi · Answer

Between Option A & Option C:
Option A says many countries. Does that include the US? One can never tell.

I went for Option C after eliminating all other options. That's one way to go!

rheam25 · Answer

Please help explain why A is wrong?

MartyTargetTestPrep · Answer

A: To discourage people from using plastic products, many countries have started levying heavy taxes on the plastic industry as a measure to increase the cost of production and the resultant price of plastic products.

What (A) describes is an ongoing issue for the makers of plastic products. The taxes represent a cost that they have to deal with.

OK.

Now, if the increase in the supply of natural gas were to result in a decrease in the price of natural gas, that decrease in the price of natural gas, and a resulting decline in the cost of the raw material polyethylene, could offset, completely or partially, the cost of the heavy taxes levied on the plastic products industry. So, in such a case, that decrease in the price of natural gas would certainly benefit the makers of plastic products by, for instance, offsetting the increased tax costs.

So, even in a situation characterized by such taxes, the makers of plastic products could experience a cost benefit resulting from a decrease in the price of natural gas.

So, the information provided by choice (A) leaves us still wondering why the makers of plastic products experienced no cost benefit from the increase in the supply of natural gas.

Andrewcoleman · Answer

E: Since the production of natural gas released from shale formation has increased, the demand for plastic products has decreased significantly.

In relation to the 1/3 of the respondants who picked this answer.

A decrease in demand on the demand curve will produce a lower price, but that is not reflected in the cost of goods sold (COGs), which is what the premise discusses.

Kratosgmat · Answer

This was my reasoning

Conclusion : However, makers of plastic products have instead reported no cost benefit as a result of the increase in the supply of natural gas.

option C says The makers of polyethylene have increased their profit margins and hence are not passing on lower cost benefits to their customers.

If makers of Polyethylene don't pass lower cost benefits to their customers ( plastic products), then the makers of plastic products don't have any incentive to make profits, (the situation maybe the same or worse than before, it will become worse if Makers of polyethylene start selling the product at a higher price). Hence, either way there is no cost benefit to makers of plastic products

VerbalBot · Answer

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As the US increased the production of natural gas

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