AJC H2 ECONS ans

Anderson Junior College – H2 Economics Preliminary Examinations Sample Answers 1 Sample Answers for Case Study 1 (a) (i) Describe the trend in the share of total paid car rides for business commuters in the US. [1] The proportion of market share for taxi rides is falling and for Uber rides is rising. [1m] (b) Using economic theory, explain how the “surge multiplier” can address “an excessive number of Uber car ride requests.” [4] When too much demand for Uber car ride, there will be disequilibrium in the market where demand for Uber car rides will increase and a shortage [1m] where quantity demanded exceeds quantity supplied of Uber rides will be resulted at the initial price . This shortage will result to an upward pressure on price and this increase in price will act as a signal [1m] for commuters to decrease their quantity demanded for Uber rides. Uber car drivers, recognising the increase in price will also be more incentivised to increase their quantity supplied [1m] of Uber rides until the new higher equilibrium is reached [1m] where the equilibrium price and quantity for Uber rides increase to address the shortage. (c) “Taxi drivers are not happy with the impact Uber is having on their business as Uber is attacking on all fronts.” Discuss how the combined effects of a decrease in price for Uber car rides and a fall in petrol price may affect taxi drivers’ revenue. [8] Change in demand A decrease in price for Uber car rides means an increase in quantity demanded for Uber car rides. As mentioned in Extract 1, “Uber is essentially synonymous with taxis”, which means that Uber car and taxi rides are close substitutes. The XED between Uber car and tax i rides will be highly positive especially during peak hours {not required of H1 students to mention XED}. This means that there will be a more than proportionate fall in demand for taxi rides from D 1 to D2 in Figures 1 and 2 below. Assuming ceteris paribus, taxi drivers’ revenue will fall. Change in supply With a fall in petro l price, as petrol is needed for driving taxis , cost of production will fall and taxi drivers will be motivated to increase the number of taxi rides since there is an opportunity to make more profits (which is total revenue minus total cost) there will be an increase in supply of taxi rides from S1 to S2 as shown in Figures 1 and 2. Assuming if the demand for taxi is relatively price elastic as there are alternative transportation means such as buses, trains and Uber cars , the increase in supply ceteris paribus, will cause a fall in price of taxi rides and the quantity demanded for taxi rides will increase more than proportionately. This would mean that t he total revenue for taxi drivers may increase instead. Combined effect on total revenue (TR): There will be n egative impact on total revenue for taxi drivers if the fall in demand is greater than the increase in supply, as shown in Figure 1. The demand curve for taxi rides will therefore shift left to a greater extent t o D2 than the increase in supply to S 2. The outcome in taxi rides market will be a

Anderson Junior College – H2 Economics Preliminary Examinations Sample Answers 2 fall in equilibrium price to P 3 and a fall in equilibrium quantity to Q 3. Hence, the total revenue for taxi drivers will fall from 0P1E1Q1 to 0P3E3Q3. There will be p ositive impact on total revenue for tax i drivers if the fall in demand is smaller than the increase in supply, as shown in Figure 2. The demand curve for taxi rides will therefore shift left to a smaller extent to D2 than the increase in supply to S 2. The outcome in taxi rides market will be a fall in equilibrium price to P 3 but a rise i n equilibrium quantity to Q 3. Hence, the total revenue for taxi drivers will rise from 0P1E1Q1 to 0P3E3Q3 Figure 1: Market for Taxi Rides – Negative impact on TR Figure 1: Market for Taxi Rides – Positive impact on TR Evaluation Make a stand on which impact is more likely: More likely for a fall in tax revenue because:  Petrol price may not form the bulk of taxi driver’s cost of providing the taxi service, as mentioned in Extract 2. There are other significant costs such as taxi rental and tax as mentioned in Extract 3 where taxis are Quantity of Taxi Rides Price Per Taxi Ride E1 S1 D1 P1 Q1 S2 E3 Q2 0 D2 Q3 P2 P3 E2 Quantity of Taxi Rides Price Per Taxi Ride E1 S1 D1 P1 Q1 S2 E3 Q2 0 D2 Q3 P2 P3 E2

Anderson Junior College – H2 Economics Preliminary Examinations Sample Answers 3 charged tax, which go to the city and the Metropolitan Transport Authority (MTA) . Hence, even with a fall in petrol price, the cost of driving a taxi may not have fallen significantly and will not justify a significant fall in supply.  The fall in demand for taxi rides may be greater as the fall in petrol price will also increase the supply of Uber car rides, thereby further lowering the price of Uber car rides and causing further switching away from Uber car rides to taxi rides. Other possible evaluative points:  On evaluation the taxi drivers’ revenue may change depending on the substitutability between Uber and taxi rides. For instance, during non - peak hours, commuters might be indifferent between either travelling via Uber or taxi, and the XED value for Uber and taxi may be less positive, the demand for taxi rides may not fall as significantly even if the price for Uber rides fall. Hence, taxi drivers’ revenue may not fall as significantly, ceteris paribus.  In addition, as the above analysis encompass es the use of demand/supply and elasticities analysis, there is a need to bear in mind that ceteris paribus conditions may not hold in reality and the elasticities data may not accurately portray the degree of responsiveness of all commuters. With the complexities in the real world context, the impact on taxi drivers’ revenue may also be affected by other changing economic conditions such as income of individual commuters (the use of YED (for H2 students) may then come into play) and gover nment policies. Level Marks L3 Good use of demand, supply and various elasticity concepts to analyse the various combined impacts on taxi drivers’ revenue. 5-6 L2 An underdeveloped attempt to use the demand and supply framework to explain the combined impacts on taxi drivers’ revenue. 3-4 L1 Brief explanation of demand and supply factors and its implication with errors. 1-2 Evaluation Marks E2 Judgement with clear justification 2 E1 Judgement without justification 1 (d) (i) With reference to Extract 2, distinguish the likely price elasticity of supply between taxi and Uber car rides. [2] Supply for taxis will be relatively more price inelastic than that of Uber. [1m] This is due to the PES determinant of mobility of factors of production identified in Extract 2 where it’s mentioned that in order for a person (the factor of production [labor] that provides the taxi rides service,) to become a taxi driver, he has to pass a test and pay rental fee. As compared to Uber rides, a person [labour] can easily become an Uber driver without having his

Anderson Junior College – H2 Economics Preliminary Examinations Sample Answers 4 license check or the need to pass any test. [1m] (ii) Extract 3 mentioned that tax was imposed on taxis and Uber car rides respectively. Using your answer for (d)( i) and appropriate diagram s, explain the difference in tax burden for drivers and commuters between taxi and Uber car rides. [5] The imposition of tax will cause the supply for taxi and Uber car rides to fall and the SS curve to shift to the left [1m] as shown on both Figure 3 and Figure 4 below for the Uber rides marker and taxi rides market respectively.