Economic Questions On Uber - Uber Legal In NSW - Case Study Assessment Answer

Uber Case Study Assignment

Assignment Task

RE-CAP & REMIND

Question 01

a) The taxi industry in NSW used to have a monopoly before the arrival of Uber. Explain with referenceto the characteristics of a monopoly why this was so. How much did a taxi license cost?

b) Assuming that the industry was making economic profits, illustrate the situation of the taxi industry monopoly in a diagram. Your diagram must be half an A4 page.

c) If this was the situation in the short run, what would happen in the long run and why?

d) Explain with reference to the characteristics of a monopoly, how Uber was able to enter the market in NSW.

Question 02

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a) Now that Uber has entered the NSW taxi services market, explain why the industry has changed from a monopoly to one that is closer to monopolistic competition. b) Re-draw your diagram in 1.

b and explain the transition from the short run to the long run after the entry of Uber. Your diagram must be half an A4 page.

c) Compare and contrast your answer in 2.b to the long run situation in a perfectly competitive market and the long run situation in a monopoly.

d) Assuming that the market has become monopolistically competitive, what are some strategies that taxi drivers could implement to help retain some of their profits, even in the long run?

e)take a photograph of an example of a firm (/s) in monopolistic competition. Share your example on social media (Twitter, Facebook, Instagram, Weibo, QQ, etc.) using the hashtags: #mqecon111 and #mqmoncomp). Include a screenshot of your social media posting - your screenshot should be just half an A4 page).

QUESTION 01 & QUESTION 02 should be stapled together with ONE cover sheet & one double-sided blank paper for the last page. The cover sheet is at the end of this document. Label this cover sheet "Question 01 & 02”.

ECONOMICS EVERYDAY

Question 03

a) Re-draw your final diagram in 2.

b - where you are re-drawing only the long run situation under monopolistic competition. Suppose that there is an increase in the price of petrol, show the short run impact on your diagram. Your diagram should be half an A4 page. b) Explain your answer to 3.a.

c) Re-draw your final diagram in 2.b – where you are re-drawing only the long run situation under monopolistic competition. Suppose that there is an increase in the price of car number plate registration, show the short run impact on your diagram. Your diagram should be half an A4 page.

d) Explain your answer to 3.c.

Question 04

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a) Research question – For traditional taxis, fares are regulated and not determined by the market. Draw a diagram of a taxi market where fares are capped with an enforced 'price ceiling that is set at $2.50 per kilometre whereas the free market equilibrium price would be $3.00 per kilometre. Your diagram should be half an A4 page. Clearly label the quantity traded (exchanged between buyers and sellers).

b) Using your diagram in 4.a, critically comment on whether all consumers are actually better off under this price ceiling compared to a free market equilibrium.

c) Under Uber, where there is no price ceiling, there is 'surge pricing' where drivers can increase their fares based on unusual increases in demand, based on what consumers are willing and able to pay. Use a graph of the market to depict such a situation of surge pricing (that takes the price beyond $3.00 per kilometre). Your diagram should be half an A4 page. Compare the two free market equilibrium points.

d) Using your diagram in 4.c, critically comment on whether all consumers are actually better off under surge pricing compared to a price ceiling.

e)take a photograph of an example of a firm's costs. Share your example on social media (Twitter, Facebook, Instagram, Weibo, QQ, etc.) using the hashtags: #mqecon111 and #mqcosts). Include a screenshot of your social media posting - your screenshot should be just half an A4 page).

QUESTION 03 & QUESTION 04 should be stapled together with ONE cover sheet & one double-sided blank paper for the last page. The cover sheet is at the end of this document. Label this cover sheet "Question 03 & 04”.

APPLICATION & AWARENESS

Question 05

a) For the purposes of this question, assume that the newly formed taxi services market that includestraditional taxis and Uber cars, is perfectly competitive (perfect competition). Draw a situation of thisindustry in long run conditions. The market is to be on the left and an individual firm is to be on theright. Your entire diagram should take up one full landscaped A4 page.

b) Explain, in detail, the long run conditions in 5.a.

5. c) Re-draw your diagram in 5.a. Assume that due to an extreme weather event, the general population issuddenly halved overnight. The population of taxi drivers is unaffected as they were all protected whilein their taxis during the extreme weather event. Show the impact of this on this new diagram.
6. d) Explain your answer to 5.c.

Question 06

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a) Assume now that the extreme weather event (in Question 5) has completely disappeared (of course, remember that the population is still halved). Now, why would some taxi drivers be unable to leave or exit the industry in the short run? What is their short run decision making rule when experiencing losses and why?

b) Draw two diagrams for two separate firms in a perfectly competitive market: one which is better off shutting down in the short run and one which is better off continuing to operate in the short run. Each diagram should be quarter of an A4 page.

c) Re-draw your diagram of your final answer in 5.c. Show the long run impact on this diagram. Your diagram should be half an A4 page.

d) Explain your answer to 6.c. e) 1 mark – take a photograph of an example of a firm (/s) in perfect competition. Share your example on social media (Twitter, Facebook, Instagram, Weibo, QQ, etc.) using the hashtags: #mqecon111 and #mqperfectcomp). Include a screenshot of your social media posting - your screenshot should be just half an A4 page)

QUESTION 05 & QUESTION 06 should be stapled together with ONE cover sheet & one double-sided blank paper for the last page. The cover sheet is at the end of this document. Label this cover sheet "Question 05 & 06”.

LEARNING LIFE LESSONS

Question 07

1. a) Suppose that the extreme weather event (in Question 5 and Question 6) killed both members of thegeneral population, as well as taxi drivers. Using a diagram of demand and supply, explain how it is possible that the equilibrium price of taxi fares could possibly decrease. Your diagram should bequarter of an A4 page.
2. b) Using another diagram of demand supply, for the same scenario as in 7.a, explain how it is possiblethat the equilibrium price of taxi fares could possibly increase. Your diagram should be quarter of anA4 page.
3. c) Draw two diagrams, one with a very flat demand curve and one with a very steep demand curve. Foreach diagram assume that there has been a decrease in supply of taxis, ceteris paribus, due to the death of taxi drivers. Compare and contrast your answers for the two diagrams. Notes: the initial equilibrium: E1, P1 and Q1 must be the same in both diagrams. Each diagram shouldbe quarter of an A4 page.
4. d) Draw two diagrams, one with a very flat supply curve and one with a very steep supply curve. Foreach diagram, assume that there has been a decrease in demand for taxis, ceteris paribus, due to deaths in the general population. Compare and contrast your answers from the two diagrams. Notes: the initial equilibrium: E1, P1 and Q1 must be the same in both diagrams. Each diagram should be quarter of an A4 page.

Question 08

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RESEARCH QUESTION

a) What is price elasticity of demand? What factors influence the price elasticity of demand for taxis?

b) Draw three diagrams of (just) the demand curve for each of the following market structures in three different graphs: Perfect Competition (firm), Monopolistic Competition and Monopoly. Mark a point “A” on all three diagrams which has the same P1 and Q1 for all three diagrams. Using these diagrams, comment on the differences in price elasticity of demand at this given point, A.

c) By reference to the characteristics of each market structure, elaborate on your answer to 8.b.

d) Show how the formulas of income elasticity of demand and cross elasticity of demand are related to the formula of price elasticity of demand.

e) 1 mark – take a photograph of an example of a firm in an oligopoly. Share your example on social media using the hashtags: #mqecon111 and #mqoligopoly). Include a screenshot of your social media posting - your screenshot should be just half an A4 page).

QUESTION 07 & QUESTION 08 should be stapled together with ONE cover sheet & one double-sided blank paper for the last page. The cover sheet is at the end of this document. Label this cover sheet “Question 07 & 08”.

Economic Questions On Uber

QUESTION 01

1. a) The taxi industry in NSW used to have a monopoly mainly because of high barriers they had set. It was difficult for other service providers to enter the market, for example, when the license fees were so high. A taxi license would require up to $400,000. That is just an absurd fee for someone who just wants to enter that market. This high barrier discouraged entry of competitors and kept the cab operators going on with their business as usual.
2. b) Situation of the taxi industry monopoly
3. c) The monopolistic nature of the market in NSW was sustainable in the short run; but in the long run, it would create weakened market forces and allocative inefficiency. According to Hawley (2015), such allocative inefficiencies would lead to high prices and low outputs.
4. d) As the NSW taxi industry enjoyed monopoly, it allowed itself to be overtaken by the allocative inefficiencies mentioned above. This inefficiencies that kept pushing prices up while doing nothing about the quality of service, opened an opportunity for anyone with a solution that would address that question. That is how Uber found a way to enter that market. They promised to offer more affordable and more convenient services

QUESTION 02

• Although Uber was able to successfully enter the market, it has faced enormous opposition from many parties; which has not allowed the company to operate at its full potential. For example, cases of Uber's taxis getting violently attacked and destroyed are common. While this has not completely scared off Uber drivers from operating, it has significantly affected the growing popularity of the company. This fact has partly caused the originally monopolistic market to just shake a little rather completely overturn it.
• The transition from the short run to the long run after the entry of Uber is characterised by a turbulent start at the beginning, but in the long run it is expected to smooth out. The CEO can be quoted saying that this is a new concept and it will take people some time before they understand and accept it.
• The transition to the long run in a perfectly competitive market would be expected to start off smoothly and maintain the pace. Introducing a product or service into a competitive market is a lot easier compared to doing the same in a monopolistic market (Foster, 2014). Transition to the long run in a monopoly is characterised by slow acceptance of the new entrant by the traditional service providers. They initially try to raise challenges that make it difficult for the entrant to begin but eventually due to the inefficiencies of the monopoly, their strategy is broken apart.
• d) Traditional taxi drivers have a load of options to help them remain competitive and retain profits even in the long run. For example, they could re-affirm their quality standards to their customers and strengthen the idea through their governing body. Uber drivers have been faced numerous accusations like rape and inappropriate physical contact with customers that has significantly tainted their image. Traditional cab drivers can use this as an opportunity to their favour and brand their services as the most secure in the market.

QUESTION 03

1. b) An increase in the price of petrol would cause an increase in the fares for Uber cabs. They will use their “price surge algorithm” to effect the increase in fares. This is because their prices are not regulated and there is no upper cap on their pricing. For Uber cabs, applying these measures in the short run does not have long-term consequences and it is just a short-term strategy for balancing demand and supply. However for the traditional taxis, there is price regulation which will prevent them from adjusting their prices in the short run. In effect, this will make the traditional cabs more affordable compared to Uber cabs and may register increased sales. On the other hand, Uber cabs may record lower profits resulting from reduced pick-up requests as customers will prefer to board any other taxi on the street.

An increase in the price of car number plate registration will work in favour of Uber. Fewer traditional taxis will be willing to register their taxis leaving consumers to opt for the available options which will be fewer traditional taxis and more Uber cabs. Such an increase will make the demand for the traditional taxis to rise since the supply will be relatively fixed. When the demand for the traditional cabs increases their prices may go up but only up to the capping threshold.

On the other hand, the increase in the price of car number plate registration would cause Uber to increase prices to balance the demand. This is because there will be an increase in demand on their service. However, this price increase on Uber to balance demand is only for the short term.

QUESTION 4

1. b) Indeed, consumers are far better off in this price ceiling. The cap threshold on the traditional taxis will have a regulatory effect on Uber as well. When price per kilometer for Uber cabs go higher than $2.50, consumers will opt for the traditional taxis. This will in turn increase demand for traditional cabs and reduce the demand for Uber cabs. With a low demand for Uber cabs, their prices will automatically fall to balance the demand and supply. This auto-regulation effect caused by the price capping protects the consumers. Assuming there was no price capping, both Uber and traditional taxis would raise their prices effectively raising the market equilibrium price.
2. d) Under surge pricing consumers will normally feel that the prices charged are above normal even when the prices are below the market equilibrium. In reality, the surge prices are normally lower than the market equilibrium prices and that’s why Uber is still in service. But still consumers would generally feel exploited when Uber fares equal or go beyond the traditional cab prices. The other downside with surge pricing is that present the illusion to consumers that they have made a deal when in reality they have made no deal at all. This is a typical characteristic of surge pricing (Hall, Kendrick & Nosco, 2015). Consumers are therefore not better off in surge pricing at all.

QUESTION 05

1. The decision on pricing and quantity are largely affected by the competitiveness of the market structure. In a competitive market like the taxi market in NSW, the taxi operators do not have much influence over the pricing as inappropriate pricing will immediately chase away customers to the competitors. In this competitive market, the suppliers of taxi services can freely enter and leave the market. In the long run, there is an effect of price capping that automatically results from these competitors who are offering an identical product. In this market, the quality of service will no longer be a quality of distinction between the competitors. All the suppliers will have a wide enough market to sell their service. Maximising profits will focus on margins by ensuring that prices are equal to marginal costs.

Economic profit equals total revenue minus total cost, where cost is measured in the economic sense as opportunity cost. An economic loss (negative economic profit) is incurred if total costs exceed total revenue. Accountants include only explicit costs in their computation of total cost. Include charges that must be paid for factors of production such as labor and capital, together with an estimate of depreciation. Profit computed using only explicit costs is called. It is the measure of profit firms typically report; firms pay taxes on their accounting profits, and a corporation reporting its profit for a particular period reports its accounting profits.

The halving of the population reduces the demand for the service, theoretically, by half. The decrease in demand causes excess supply to develop at the initial price. An increase in supply will cause a drop in prices, and as the prices fall, suppliers of the services become less willing to supply the services thereby decreasing output (Stanwick, 2013). An increase in demand for the services will lead to an increase in the quantity services or their availability and an increase in equilibrium price. The increase in demand will make suppliers supply more at the initial price. In this case, the decrease in demand causes prices to fall. Uber cabs are more likely to remain profitable in such economic conditions since they can drop their prices to lower than the set prices for the traditional cabs.

QUESTION 06

a) The decision to exit the business after such an event will depend on the extent to which one is operating at a loss. The typical reaction in that kind of scenario would be to try to make more sales as you wait to see if demand will stabilise. This is one reason that some taxi drivers will be unable to exit the industry in the short run. The other reason is that a taxi driver might not want to leave before they settle their losses. During such a season of low demand, it is not uncommon that a business would be operating on losses (Baron, Brogaard & Kirilenko, 2012).

d) The taxi drivers will continue to provide services until such a point where marginal revenues will equal marginal costs. In the short run, the decrease in demand will cause a decrease in prices. In the long run, the decrease in demand will cause a decrease in the output. In the short run a decrease in demand will cause firms to experience economic losses (Dreßler & Overesch, 2013). The taxi drivers may experience losses initially and some may opt to walk out of business.

QUESTION 07

1. a) The decrease in demand leads to a decrease in equilibrium quantity and a decrease in equilibrium price. A resultant decrease in price is indeterminant meaning it depends on the extent to which each of the variables has decreased. An equilibrium price in taxi fares could decrease if the demand was more affected such that the demand is relatively lower even with the low supply.
2. b) In this scenario, the decrease in supply was to a greater extent compared to the decrease in demand. This had the overall effect of a higher demand than supply. This perceived shortage of supply will lead to increase in prices of taxi fares.

The flat characteristic in the supply has occurred due to the competitiveness of the market. The death of the taxi drivers has driven down the supply of taxis while on the other hand the number of customers remains relatively higher. This causes a rise in demand of taxi services.

The deaths of the general population have led to a fall in demand for taxi services. In the first diagram the supply remains constant as the demand for the little supply diminishes. In the second case, the supply is affected by the fallen demand and begins to fall as well.

QUESTION 08

Price elasticity of demand is the responsiveness of the quantity of goods or services produced to a change in their prices. For most goods and services, a change in the price will always have an accompanying change in the quantity of those goods or services that will be produced. Factors that influence price elasticity for taxis include availability of alternatives like public transport, the nature of the change in the prices, for example temporary changes, and the price of the services relative to customers' other expenditures.

b)The differences in price elasticity are mainly caused by the availability of alternatives in the perfect competition and monopolistic competition markets. In the monopolies, there is little elasticity.

d) Relation between the formulas of income elasticity of demand and cross elasticity of demandIncome Elasticity of Demand = % change in quantity demanded / % change in income

Cross elasticity of demand is simply given by;

CPEoD = (% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)