Passage

Passage – 2 It is easy for the government to control State-owned companies through nods and winks. So what really needs to be done as a first step is to put petrol pricing on a transparent formula — if the price of crude is x and the exchange rate y, then every month or fortnight, the government announces a maximum price of petrol, which anybody can work out from the x and the y. The rule has to be worked out to make sure that the oil-marketing companies can, in general, cover their costs. This will mean that if one company can innovate and cut costs, it will make greater profits. Hence, firms will be more prone to innovate and be efficient under this system. Once the rule is announced, there should be no interference by the government. If this is done for a while, private companies will re-enter this market. And once a sufficient number of them are in the fray, we can remove the rule-based pricing and leave it truly to the market (subject to, of course, the usual regulations of anti-trust and other competition laws).

Consider the following statements : According to the passage, an oil company can make greater profits, if a transparent formula for petrol pricing is announced every fortnight or month, by 1. promoting its sales. 2. undertaking innovation. 3. cutting costs. 4. selling its equity shares at higher prices. Which of the statements given above is/are correct ?

(a) 1 only
(b) 2 and 3 ✓ UPSC's answer
(c) 3 and 4
(d) 1, 2 and 4

Why the answer is (b)

• The passage says a transparent formula would fix petrol prices from crude price x and exchange rate y, so companies cannot simply raise prices to earn more.

• It also says the formula must be worked out so oil-marketing companies can, in general, cover their costs.

• The passage then states that if one company can innovate and cut costs, it will make greater profits.

• Therefore, the only profit-enhancing actions stated are undertaking innovation and cutting costs, so option (b) 2 and 3 follows.

Why the other options are wrong

(a) 1 only: Option (a) is wrong because statement 1, promoting sales, is not mentioned in the passage as a way to make greater profits.
(c) 3 and 4: Option (c) is wrong because statement 4, selling equity shares at higher prices, is not mentioned in the passage as a way to make greater profits.
(d) 1, 2 and 4: Option (d) is wrong because it includes statements 1 and 4, neither of which is stated in the passage as a way to make greater profits.

Asked in the CSAT Paper II of the UPSC Civil Services Preliminary Examination 2014, held on 24 August 2014. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.