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 Fi