Is it correct that their in A is ambiguous, can refer to biological traits or products of natural selection?

But they is not because it's parallel to biological traits (and so also refering to biological traits)

you can use "due to" and "because of" in any sentence - you just have to structure the sentence correctly around this phrase. This is a bit of a red herring here - they're trying to get you to spend time deciding based on those two sets of words rather than base the decision on what you should be basing it on.

Good question.

Your first thought here probably was - and should be - parallelism. However, you're right that 'are not ... but are' and 'are not ... but' would both be legitimately parallel constructions in this context. So, the reasoning goes, we should take the one with one fewer word. Right?

Here's the problem: In the context of this longer, more complicated sentence, the 'but' (without 'are' after it) is, unfortunately, ambiguous. Consider this sentence:
Jimmy was not the typical class president, loved by most of the students, but also hated by a fair number as well; rather, he was loved by all the students.
The most probable reading here is that all of the words 'loved by most of the students, but also hated by a fair number as well' are a description of 'the typical class president.'

If you look at choice C, it can be read this way; one could (probably should, even) take ALL the words '...favored because they enhance reproduction or survival, but simply random byproducts...' as an elaboration on the phrase 'products of natural selection'.
It's harder to see than in the example of Jimmy, above, for two reasons:
(1) Because of the way the original sentence is written, you're biased toward reading the sentence the way it's 'supposed' to be written. (In the example with Jimmy, there's no prompt sentence, so you're free to read it as you like.)
(2) It's longer.

Hope this helps.

there are two ways of reading the sentence if choice c is inserted. here they are, with the boldface in each indicating exactly what is construed as a modifier:

1) Paleontologist Stephen Jay Gould has argued that many biological traits are not the products of natural selection, favored because they enhance reproduction or survival, but simply random by-products of other evolutionary developments. --> this is the most obvious reading

2) Paleontologist Stephen Jay Gould has argued that many biological traits are not the products of natural selection, favored because they enhance reproduction or survival, but simply random by-products of other evolutionary developments. --> counterintuitive if you know anything about evolutionary biology, but grammatically ok -- and therefore a competing interpretation, which is fatal to clarity.

Hi Ron, I still have trouble understanding the second reading.

I believe that if we remove the part "favored because they enhance reproduction or survival" the ambiguity disappears

I think Ron said when you have one part parallelism signals such as "and, or, but etc", you look for the words coming after signals as these words are 'locked in' words. So does that mean we are not bound by existing words in the first part?

To be more specific. Choice (a) says.. has "that" in the second part of the signal and we have "that" in the first part of signal as well. hence this is parallel

choice (d) , on the other hand, has 'are',which is also present in the first half. But first half also contains 'that' but since our locked in word is 'are' we no longer care about 'that' in first part as we did in choice (a) Is this correct assessment?

'because of enhancing' = incorrect idiom
not only is this an incorrect idiom, but it also eliminates any reference as to exactly what enhances reproduction or survival.

Paleontologist Stephen Jay Gould has argued that many biological traits are not the products of natural selection, favored due to their enhancement of reproduction or survival, but that they are simply random by-products of other evolutionary developments.

(A) due to their enhancement of reproduction or survival, but that they are

(B) due to the reproduction or survival they enhance, but they are

(C) because they enhance reproduction or survival, but

(D) because they enhance reproduction or survival, but are

(E) because of enhancing reproduction or survival, but are

Good question and great explanations. Just to add my 2 cents:

As Ron has mentioned above this question contains 1 red herring: the pronoun issue, which is prevalent in all the potentially close answer options.

There are 2 core issues being tested here (1) parallelism and (2) advanced construction (see strategy guide lesson on VANs). Issue (1) has been discussed in much detail. Regarding issue (2), experts please correct me if I am wrong, I narrowed it down to options (C) and (D) because both contain crisp sounding action verbs as compared to the damp sounding nouns in the other options. Then I picked (D) because of parallelism. Is that correct?

Cheers,
Abhi