Founded in 2009 by Travis Kalanick, Uber provides transportation service in U.S., European, and Asian cities. In the year 2014, its gross revenues were $2.957 billion; net revenue after commissions and incentives, $495 million; cost of revenue, $400 million; operating expenses, $661 million; for an EBIT of $565 million. The original Uber model of operations was for the driver to use his or her own vehicle and offer services as and when they liked. The Uber webpage for drivers DBA 7180, Managerial Economics and Business Theory 4 emphasizes that drivers can use their own car, set their own schedule, and get paid weekly. More recently, Uber has arranged for drivers to rent cars to provide Uber services. Uber clients book and pay for rides through the smartphone. As noted in Business Insider’s article by James Cook, after each ride, the Uber client rates the driver on a scale from 1 to 5. If a driver’s rating falls below a particular level, Uber discontinues her or him from offering the service. Uber also allows drivers to rate clients. In January 2015, Uber extended fare cuts from the largest U.S. markets to 48 more cities. Uber asserted that the lower fares would benefit clients and drivers because the higher demand would allow drivers’ incomes to increase. The higher demand makes the drivers more efficient, so that they can get more trips every hour, which means more earnings for them. By contrast with Uber, whose drivers provide service with private cars, the Chinese services, Didi Dache (backed by Tencent) and Kuai Di Dache (backed by Alibaba) are smartphone-based applications to book taxis. In 2015, faced with competition from Uber (backed by search engine Baidu), Didi Dache and Kuai Di Dache merged. Following the merger, they continue to operate as separate services. Based on the case above, answer the following questions: To what extent do you think that any economic inefficiencies of the original Uber operating model may impact the operational strategy and ultimately the success or failure of the firm? Considering the abundance of consumer ethics-related concerns about Uber, do you think that the industry should be further regulated? Based on the literature presented in this unit and your own research, do you think the current regulations are fair? Appraise the economic concepts of the operational strategy which may result in reduction in prices and resultantly lead to increase in demand. Explain how to use this concept to calculate the change in revenue from a 1% cut in prices. In Chicago, the reduction of fares by 23% led to 12% increase in revenue. What do these data imply about the concept of regulations, mentioned above? On a figure with dollars per hour on the vertical axis and hours of labor supplied on the horizontal axis, please sketch the driver’s marginal benefit from providing labor. Note: If the driver supplies more hours, he or she raises the probability of getting work, but at a diminishing rate. Explain how a reduction in the fare affects the marginal benefit from providing labor. Consider both the direct effect of the fare and the indirect effect (lower fare attracts more customers and raises the probability that the driver gets work). From a driver’s viewpoint, what is the optimal quantity of labor to supply? Intuitively, does an increase in earnings necessarily make drivers better off? Your response must be a minimum of two pages in length. You should apply information from the literature review included in the unit lesson as well as any other scholarly sources you find necessary for a total of at least two sources. All sources used, including the textbook, must be cited and follow APA guidelines, and your paper should be formatted in APA style to include a title and references page.
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