Question

Mansour: We should both plan to change some of our investments from coal companies to less polluting energy companies. And here’s why. Consumers are increasingly demanding nonpolluting energy, and energy companies are increasingly supplying it.

Therese: I’m not sure we should do what you suggest. As demand for nonpolluting energy increases relative to supply, its price will increase, and then the more polluting energy will cost relatively less. Demand for the cheaper, dirtier energy forms will then increase, as will the stock values of the companies that produce them.

Therese responds to Mansour’s proposal by doing which of the following?

Option A
Option B
Option C
Option D
Option E

(This question is from Official Guide. Therefore, because of copyrights, the complete question cannot be copied here. The question can be accessed at GMAT Club)

Solution

The Story

Mansour: We should both plan to change some of our investments from coal companies to less polluting energy companies.

Mansour makes a suggestion to somebody that they both should plan to change some of their investments. What change? From coal companies to less polluting energy companies.

And here’s why. Consumers are increasingly demanding nonpolluting energy, and energy companies are increasingly supplying it.

In these lines, Mansour supports his suggestion. Why should they invest in less polluting energy companies? Since consumers are increasingly demanding nonpolluting energy, and energy companies are increasingly supplying it. (Since there’s more demand for less polluting energy companies, these companies will probably grow well and thus seem to be a better investment than coal companies, which pollute more)

Therese: I’m not sure we should do what you suggest.

Therese casts a doubt on Mansour’s suggestion.

As demand for nonpolluting energy increases relative to supply, its price will increase, and then the more polluting energy will cost relatively less.

In this statement, Therese explains the reason for her doubt. She says that as demand for nonpolluting energy increases even more than the supply, the price of this energy will go up (basic demand and supply). In such a case, nonpolluting energy will be relatively more expensive than the more polluting energy.

Demand for the cheaper, dirtier energy forms will then increase, as will the stock values of the companies that produce them.

The above will lead to an increased demand for the more polluting energies. The increased demand will increase the stock prices of these companies. (And thus, it doesn’t make a lot of sense to abandon coal companies and buy less polluting energy companies instead)

Gist: Mansour recommends switching from more polluting coal companies to less polluting companies since consumers are increasingly demanding less polluting energy. However, Therese goes against the recommendation by saying that the increased demand for the less polluting energy will increase its price and thus make it relatively more expensive than the more polluting energy. As a result, consumers will again go back to the more polluting energy companies, leading to higher stock prices for these companies.

The Goal

We have to find a way in which Therese responds to Mansour’s suggestion. From our understanding above, we can see that Therese points out market dynamics (more demand -> higher prices -> customers switch back to coal companies) overlooked by Mansour and thereby casts a doubt on his suggestion.

The Evaluation

(A) Incorrect. Therese is not ‘supporting’ that consumers use less expensive forms of energy. She just assumes this idea while making her argument. That’s why she jumps from “the more polluting energy will cost relatively less” to “Demand for the cheaper, dirtier energy forms will then increase”. However, nowhere is Therese advocating or recommending that consumers do so.

(B) Incorrect. Therese never indicates that energy derived from coal can be nonpolluting.

(C) Incorrect. Therese rather agrees with this claim. She builds her argument on the top of this claim (more demand for nonpolluting energy -> higher prices -> consumers shift to less expensive polluting energy).

(D) Correct. By casting a doubt on Mansour’s suggestion to shift their energy investments, Therese does suggest that ‘not shifting the investments’ makes more sense.

(E) Incorrect. This option is wrong for the below reasons:

  1. “Providing a reason”: Therese doesn’t provide a reason to doubt this assumption.
    Given that Therese says “demand for nonpolluting energy increases relative to supply”, we can say that she thinks that the supply of nonpolluting energy will not increase in line with the demand. So, while we can say that Therese doubts this assumption, there is no reason given to doubt this assumption.
  2. Mansour does believe that both supply and demand will increase. However, he does not necessarily assume that both will increase ‘in line’.
  3. Even if we say that Mansour assumes so, Therese doesn’t stop at doubting this assumption. Rather, she builds her argument on the top of this doubt, and the argument ends with the stock prices of the polluting energy companies. Thus, saying that Therese responds by doubting this assumption is also an incomplete way of describing her argument.

Additional Notes

SC Notes:

  1. The second sentence is “And here’s why”. The use of “and” to begin a new sentence has increasingly become accepted. You’ll see the same use quite commonly on WSJ.com.
  2. The third sentence uses “, and” to connect two independent clauses. The “comma+FANBOYS” rule holds.
  3. In the construction “cheaper, dirtier energy forms”, the two adjectives are connected not with an “and” but with a comma. This usage is perfectly fine in case of connecting two single-word adjectives.

This solution was created by Anish Passi and Chiranjeev Singh.

If you have any doubts regarding any part of this solution, please feel free to ask in the comments section.

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