Now this is as per my understanding:

The numbers of students in this school is low. - This is wrong and according to MGMAT's explanation.
when business schools are each worried about the declining numbers of PhDs, this usage is not completely wrong. It (probably) means that people at each business school is worried about the declining number of PhDs in their school. Then for all schools put together, all of them are worried about the (declining) numbers (of PhDs).

Also, we got to admit one thing. The idea of Sentence correction is to choose the best possible answer. In the given question, none of the other options are right or better in any way than the correct answer, C.
Since you selected B, I assume you already deemed A,D and E wrong. Between B and C, B talks about something being lowered. It is not even right and the whole sentence is wordy, awkward and unidiomatic. C works much better.

For example, if you had a question where the NON-underlined portion of the sentence is grammatically "not great", we cannot correct them or argue with GMAT that the question is wrong. Our job is to fix the sentence in the best way possible.