Microeconomics - Assignment

Question 1: Taxi markets in the past used to be characterized by the fact that per unit (e.g., per mile) prices were almost always the same. Sometimes there may have been a different per unit price at night, but in many markets that was the only variation.
Think of drivers as the suppliers of rides. If I drive at 1 PM or I drive at 1 AM, it would seem that the explicit costs of driving from, e.g., Roosevelt Island to Flushing would be the same, or if anything lower at 1 AM --- it will take close to the same amount of time (and might be shorter at night) and the same amount of gas.
However, it seems we observe a smaller supply of drivers at 1 AM than 1 PM (i.e., the supply curve is shifted in at 1 AM relative to 1 PM). Using the notion of opportunity cost, explain why focusing only on the explicit costs is incorrect, and what costs are causing the shift in the supply curve. 2 pages.

Question 2 (10 points): Suppose we have a market for rides in NYC, which like the older taxi markets, didn't have prices adjust. Suppose the price in the market is well-calibrated for periods of normal demand, so that the number of rides supplied (e.g., via taxis) equals the number of rides demanded.
But now consider a day where many more individuals visit NYC than usual, but there are no additional taxis in service, and the price is the same as a normal day. What happens to the demand curve? What happens to the supply curve? Since the price doesn't adjust, what happens to the quantity demanded versus the quantity supplied? What is the real-world impact of this? Use no more than 4 figures chart and 2 pages

Question 3 (10 points): Suppose a ``basic version of Uber now runs the market for rides in the market. All this basic version of Uber does is adjust prices until supply equals demand (it acts as the invisible hand). Consider the scenario in the last question. We have a day where many people come to NYC. Now what would expect to happen to the price for rides (since it can adjust). What would we expect to happen to the quantity supplied and quantity demanded on this day relative to normal days? What does this mean in the real world? Why might this be better or worse than what happened in the previous question, where prices couldn't adjust? How does this relate to surge pricing? Use no more than 4 figures chart and 2 pages.

Question 4 (15 points): One reason Uber justifies ``surge pricing is that it brings more individuals out on the road to drive. But what happens if this can't happen? Consider the same scenario as the past two questions but suppose that there are no more drivers that can enter the road --- everyone who can drive is already driving on normal days. Please describe (and draw) what the supply curve looks like if this is true? Now what happens on the day when many consumers come to the city to price, quantity demanded, and quantity supplied? Does the price go up more or less when there are no more drivers to enter the market, compared to when there are drivers that could enter the market? Why might surge pricing be more or less justified in the former situation, compared to the latter? Use no more than 4 figures chart and 2 pages.

Question 5 (20 points): Of course, as we discussed in class, Uber does more than just act as an invisible hand. A second way to view Uber is that it is an intermediary with market power. Let's assume it has an extreme form of market power. It buys drives from drivers as a monopsonist, and it sells drives to consumers as a monopolist.
Using a figure that has both supply and demand curves, please explain what marginal revenue and marginal cost curves Uber faces, and draw them out, given supply and demand curve. Explain to me why the supply and demand curves are not the same as the marginal cost and marginal revenue curves that Uber faces.
What quantity should Uber choose to buy and sell in terms of rides in order to maximize profit? Can you describe to me Uber's profits in this market using the figure? What is the dead-weight loss? What is the surplus for consumers? What is the surplus for drivers? Use no more than 4 figures chart and 2 pages.

Question 6 (20 points): Suppose Uber operates in a city where the government imposes a fixed surcharge on each ride --- in other words, for each ride the drivers must pay the city t dollars.

If we think of Uber as being a fully competitive market (i.e., Uber simply sets a price so that supply equals demand), show graphically, and describe in words, how this influences the pricing of rides and the quantity of rides.

Instead, if we think Uber operates as a monopolist and monopsonist, then how does this change the pricing of rides and the quantity of rides? How does it change Uber's profit? Please describe and show graphically. Use no more than 3 figures chart and 2 pages.

Question 7 (20 points): The idea behind dynamic and route-based pricing is that Uber can use knowledge about who an individual is and where they are travelling to determine exactly how much they would be willing to pay. Let's suppose Uber can do this for riders, but not for drivers. Suppose Uber can determine exactly what the value of any given ride is for any given consumer. Moreover, suppose that Uber can charge different prices to different riders. If this is true, can you tell me about the relationship between marginal revenue and demand now? What is the price Uber should charge for any given individual? Building on the previous figures, show me how, if Uber can do all this, how this will change Uber's calculation of the profit maximizing quantity, Uber's profits, rider surplus and driver surplus? Use no more than 4 figures chart and 2 pages.

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