This question wants us to duplicate the flaw in the original argument in a new argument answer choice. Here the most accurate and efficient way to get through the answer choices is first to understand the original argument in a highly abstract way that will help us see the skeleton of the logic rather than the distractions of the content.
Here's how I'd boil down the argument itself:
We have the least fair X system in group Y.
Therefore the most important part of X system is the worst in group Y and should not be copied.
The flaw here seems to be assuming that is what is true of the whole is true of each subset.
Let's go through our answer choices and see if anything matches up to what we have here.
(A) People who live in group Y tend to be more X than people who do not live in group Y. Therefore a specific example of someone born in group Y will be more X than someone not born in group Y. Nope, this doesn't look like what we are looking for. For one thing this has its own flaw but now the same flaw as our argument. The flaw here is that it mistakes something that is probably true (the premises are related to a tendency) for something that is definitely true (in the assumption that anyone in a particular town will be more educated than anyone not in a town). This argument is not concerned with subsets at all.
(B) At a certain group Y, either X or Y is the most demanding. Therefore a particular subset of X or Y is the most demanding. This isn't precisely what we're looking for (why are there two majors they are talking about instead of just one?), but it *does* repeat the flaw - that is namely mistaking the properties of a system for the property of a subset of that system. I'll keep it but also move on to the other answer choices.
(C) For many years, a company has made the best X. Therefore since it uses a lot of the same stuff to make Y, Y must be the best. This also does not have a subset conflation issue as in the original argument we are looking for.
(D) X are closely related to Y. Therefore even though they (X) are far more Z than Y, their W are the same as Y. Basically there is no way this is the answer. It's far more complicated than the argument we originally looked to, and I didn't see any subsets in there unless we assume that cats are a subset of tigers or vice versa.
(E) This one is fairly simple, so I won't even put it into abstracted form. It doesn't have a subset conflation issue, though it does have a flaw (do you see what it is? care to post and share with us?)
Therefore, even if (B) wasn't precisely what we wanted, it now looks pretty good. That's our answer, and it's a good lesson in not eliminating answer choices overly quickly, especially on the difficult questions that come up later in the LR sections.