Long essay question:

Question 2) Explain how economists calculate the rate of return that individuals get from investments in their human capital and basic empirical results of these calculations. A perfect answer will explain the types of costs/benefits included in these calculations, how the actual calculation is done (You are not expected to do this calculation) and empirical results. Use only material provided in this course to answer this question. (18 pts)

CASE NO. 4

In 2015 China had 750 million urban commuters, making it the largest commuter market in the world, roughly five times the size of the 150 million U.S. commuter market. However, Chinese car ownership was comparatively low, with only 69 car owners for every 1,000 people living in mainland China versus 786 car owners for every 1,000 people in the United States in 2014. China also had a short supply of taxis. For example, Beijing had 60,000 taxis to cover a population of 11.5 million in 2015. Taxi drivers suffered poor pay, earning even less during rush hour when heavy congestion left them idling in traffic instead of completing fares. As a result, taxi drivers sometimes refused passengers traveling only short distances and elected to take their breaks during times of peak demand (e.g., rush hour). Many urban commuters had no choice but to rely on buses, trains, and bicycles for transportation despite dissatisfaction with the reliability, comfort, and personal space these modes offered.

These factors made China an attractive market for new companies offering ride-sharing and online chauffeuring services. However, ambiguity existed around the legal status of these upstart options. The Chinese government accused companies offering ride-sharing apps of providing illegal taxi services, created checkpoints to fine drivers without commercial taxi licenses, and even conducted raids of ride-share company offices, shutting them down in some cities. Nevertheless, the government also partnered with some local ride app companies to build an integrated online taxi-hailing service for the four major taxi companies in China.

Uber China

Uber entered China in 2013 with a pilot program in Shanghai, the country’s largest city. The ride-hailing app featured the UberBlack brand, the high-end service that delivered luxury sedans for each trip. Consistent with Uber’s process in other global markets, the app assigned drivers to requested rides using its GPS algorithms to find the closest driver. Uber also partnered with Baidu, China’s largest search engine, for maps and GPS and with Alipay, China’s largest mobile payment platform. Baidu’s partnership with Uber represented one of its competitive fronts in its effort to keep pace with the other two leading Chinese internet companies, Alibaba (Alipay’s parent company) and Tencent.

Chinese consumers did not initially warm to UberBlack, complaining about the high price of the service. Instead of contracting with private car owners, as Uber did in the United States, Uber China partnered with local car rental and chauffeur companies in an attempt to sidestep regulatory issues, so the UberBlack rate far exceeded a typical taxi fare for similar distances. As a result, when Uber expanded to Beijing and Shenzen, it did so with UberX, its lower-cost service that relied on mid-size sedans. By June 2015, Uber competed in 11 of the 15 most populous cities on the Chinese mainland, and Uber China represented the largest market for Uber outside of the United States. Uber China logged more than 1 million rides per day in 2015.

To address the needs of price-sensitive consumers, Uber China dramatically reduced its prices on UberX and introduced “People’s Uber” in October 2014. People’s Uber, a sub-brand unique to China, was officially defined as a non-profit ride-sharing program; Uber connected

passengers with drivers but did not receive a portion of the driver’s earnings. (In contrast, Uber kept 20% of the total fee per ride in the United States.) This structure allowed the service to operate legally when the government cracked down on for-profit ride-sharing services. People’s Uber also helped introduce the Uber brand to the masses, with the hope that a portion of passengers would trade up to its for-profit services, UberX and UberBlack. People’s Uber based its fares on the cost of owning and operating a car, which often fell below taxi fares for comparable trips. Drivers also benefited from the People’s Uber fare structure, as they were able to keep the total fare when driving for Uber but had to pay licensing fees when driving a taxi.

In its for-profit offerings, Uber China faced intense competition from local players Didi Chuxing and Yidao, which together controlled more than 89% of the ride-hailing market in 2015. To compete, Uber spent more than $2 billion subsidizing rides for both drivers and passengers. For example, one promotion paid first-time Uber users 30 yuan. Current users of Uber could receive a 10 yuan coupon up to three times a day, and drivers received a 10 yuan reward for completed rides up to five times a day. Although this program obviously attracted both passengers and drivers, it also led to abuse. Passengers and drivers set up fake accounts to skirt the limits on the promotion incentives they could earn. It also initiated a brutal price war with competitors.

In addition to battling for customers and drivers by using price as a weapon, Uber China diversified its services by adding green (hybrid) car services and limousine rentals. As of October 2015, Uber China had built a business valued at more than $8 billion.

Competitors

Didi Chuxing

In 2012, a year before Uber entered China, Didi Dache (“dache” roughly translates to “taxi calling” in Mandarin) was founded as a taxi-hailing app. It built a substantial customer base by establishing relationships with the largest taxi companies in China before branching out to offer ride shares. The company quickly became the leader in the ride-hailing market with 78.3% share by offering aggressive subsidies to both riders and drivers and by acquiring key

rivals.⁴ Specifically, in February 2015, Didi completed a $6 billion partnership with its domestic rival Kuaidi Dache to form Didi Chuxing.

Didi Chuxing’s vision was to be the one-stop travel platform for Chinese consumers, offering an array of sub-branded services named for their specific functions: Didi Taxi (taxi hailing), Didi Fast Ride (sedan ride-share equivalent to UberX), Didi Chauffeur (premium car ride-share equivalent to UberBlack), Didi Carpool, Didi Sub Driver (drivers for one’s own car when one is incapable of driving, such as after drinking), and Didi Bus (online bus booking). To achieve this goal it built partnerships with the three largest technology companies in China. As with Uber, Baidu provided maps for Didi’s app, and Alipay processed the company’s payments. The third key partner was Tencent, China’s largest internet company, which also owned the largest social media platform and the number one messaging service in China (WeChat). Didi users could hail cars with the near-ubiquitous WeChat app and pay with WePay (also from within the app). Unlike Uber’s app, which assigned drivers to passengers’ requests, Didi’s

app relied on drivers to respond to passenger requests. Drivers had the freedom to choose which ride requests to accept and which to refuse. To entice drivers into accepting shorter, less lucrative trips, consumers could add a tip as part of the request. As of 2016, Didi Chuxing logged more than 10 million trips per day and boasted a value of $36 billion.⁵

Yidao

A second Chinese company, Yidao, focused exclusively on its customized chauffeuring service and avoided competing on the basis of price. Yidao partnered with the largest car rental companies in China with the goal of building a platform for rental companies to interface with passengers. Unlike Didi Chuxing’s and Uber’s services, Yidao passengers submitted a request on the app, which then returned a list of drivers who had accepted the order. Passengers then chose a driver based on the detailed information about the driver that the app provided. As of October 2015, Yidao covered 101 cities (24 outside of China), completed more than 40,000 daily chauffeur-driven rides, and had over 4 million active users, with a value of about $1 billion.⁶

The Sale

On August 1, 2016, after spending more than $2 billion (13 billion Chinese yuan) of the $11 billion it had raised globally, Uber sold its Chinese operation to Didi Chuxing. Two years earlier, Travis Kalanick, Uber’s CEO, had sought to invest in Didi, but Cheng Weng, the Beijing-based CEO, spurned the offer. Weng predicted even then that Didi could outmaneuver Uber in China and even unseat it as the leading ride-share company in the world.

The sale involved a share-swap deal whereby Uber and outside investors in Uber China received 20% of the merged company. Through Didi’s ownership stake, the deal also gave Uber an ownership stake in Lyft, its largest U.S. competitor, and Grab Taxi, Uber’s largest rival in Singapore. Didi committed to operating Uber China as a standalone app under the Uber brand in China.

Looking back on Uber’s venture into China few key questions remain. Could Uber have been a successful standalone company if it had adopted a different globalization strategy?

Questions to Answer

1. What made the Chinese market attractive to Uber? Why did Uber believe it could succeed

in China?                                                                                                                

2. What makes Uber truly ‘global’ in its outlook? Do you think technology, and cultural

and political changes affected the orientation of Uber?                             

3. If you look back to the Uber China, what are the possible reasons that you would identify

that shattered the dream of Uber in the Chinese market.           

ZPharma Co., a pharmaceutical company, sells three different products: Zdiet, a Weight Loss Medication, Zataflam, a Non-Steroidal Anti-Inflammatory and Zolymox, an Antibiotic. Due to a new government regulation with regard to pricing medications, suppose that the prices of these products have increased as follows: Zdiet (25%), Zataflam, (20%) and Zolymox, (10%). As a result, the monthly quantity sold from each product declined by the following percentages: Zdiet (35%), Zataflam (12%), and Zolymox (5%). Calculate the price elasticity of demand for the three products: Zdiet, Zataflam and Zolymox. Interpret your results to the best of your ability. Analyze the potential effect of the increase in prices on sales revenue of each product. Now, suppose the decline in demand indicated above was caused by a 20% decrease in income level. How would you best describe each product

1. Discuss the factors that affect the following

1. International Portfolio Investment
2. Direct Foreign Investment

A company borrowed $500,000 and repaid the loan through yearly payments of $20,000 for 24 years plus a single lump-sum payment of $1,000,000 million at the end of 24 years. The interest rate on the loan was closest to:

The following five alternatives that are evaluated by the rate of return method, If the alternatives are mutually exclusive and the MARR is 15% per year, the alternative to select is:

10 points

Five mutually exclusive cost alternatives that have infinite lives are under consideration for decreasing the fruit-bruising rates of a thin skin-fruit grading and packing operation (peaches, pears, apricots, etc.). The initial costs and cash flows of each alternative are available. If the MARR is 15% per year, the one alternative to select is:

Suppose that two identical firms produce widgets and that they are the only firms in the market. Their costs are given by

C1=60Q1

and

C2=60Q2

where

Q1 is the output of Firm 1 and Q2 is the output of Firm 2. Price is determined by the following demand curve:

P=2700−Q where Q=Q1+Q2

Find the Cournot-Nash equilibrium. Calculate the profit of each firm at this equilibrium. (For all of the following, enter a numeric response rounded to two decimal places.)

When competing, each firm will produce ___ units of output.

In turn, each firm will earn profit of ___.

Suppose the two firms form a cartel to maximize joint profits. How many widgets will be produced? Calculate each firm's profit.

Each firm will produce ___ units of output.

In turn, each firm will earn profit of ___.

Suppose Firm 1 were the only firm in the industry. How would market output and Firm 1's profit differ from that found in above?

Firm 1 would produce ___ units of output.

Firm 1's would earn profit of ___.

Returning to the duopoly above, suppose Firm 1 abides by the agreement but Firm 2 cheats by increasing production. How many widgets will firm produce? What will be each firm's profits?

Firm 2 would cheat by producing ___ units of output.

As a consequence, Firm 1 would earn profit of ___.

Firm 2 would earn profit of ___.

The Covid-19 pandemic creates opportunities and threats for practically every business in every industry. What strategic approach should a company pursue when dealing with a Black Swan event such as this? Why? While all companies have different criteria regarding the specific strategic decisions that will be made, ethical decisions are also very relevant and should be more consistent across industries and companies. Indeed, in many cases ethical decisions are likely the most important as the heath of employees, customers, and their families are at risk. If you were the CEO of a non-essential retail business, how would you handle the current crisis? Assume that simply shutting down the business for over 30 days would place the company at serious risk of bankruptcy.

Two students debate about the realism of economic assumptions. Donald is an economics student and Boris is a sociology student. They argue about a key assumption in the labor supply model: leisure is a good (more leisure is preferred to less leisure). Boris argues that some people enjoy work, therefore hours of work is not a bad and the labor supply model is not applicable to these people. Donald argues that that even if these people enjoy work, the labor supply model is still applicable if the marginal utility of leisure if larger than the marginal utility of work. Who is correct? Explain.

Assume that the labor market is competitive, where the labor demand curve is strictly downward sloping and the labor supply curve is strictly upward sloping.

(a) Suppose the government imposes a minimum wage on this labor market. Why would the minimum wage cause a deadweight loss (welfare loss)? In what sense is it a loss?

(b) How does the deadweight loss depend on the elasticities of the demand and supply curves? Explain.

(c) If the minimum wage created a deadweight loss, why would the government impose it? Discuss.

Question 1

a) Using graphs and explaining the mechanisms, determine the equilibrium in an open economy using the model of the market of loanable funds and foreign currency exchange. Discuss how the interest rate, r, and the exchange rate, e, are determined.

b) In the above, what happens when the government runs a budget deficit?

c) In question (a), what happens if the government decides to implement an import quota? Briefly explain why a government would implement such a trade policy.

d) Explain, using graphs, how the political instability in Mexico in 1994 lead to capital flights

A plasma arc furnace is being considered for the incineration of medical wastes at a public hospital. The initial investment is $3,000,000 and annual revenues are expected to be $1,800,000 over the six-year life of the furnace. Annual expenses will be $1,000,000 at the end of year one. The salvage value of the furnace after six years is $700,000. Assume MARR is 10%.

What is the Internal Rate of Return (IRR) on this furnace? Try 10% and 20%, and then use the interpolation method to find the IRR. (correct your final answer to two decimal places)

A large manufacturing company is now evaluating three mutually exclusive production systems. The following table describes the data:

Apply repeatability assumption and use the AW method to select the best system. The MARR is 10% per year, and the system chosen must provide service for 20 years. (correct your final answer to 3 decimal places)

A large manufacturing company is now evaluating three mutually exclusive production systems. The following table describes the data:

Apply repeatability assumption and use the PW method to select the best system. The MARR is 10% per year, and the system chosen must provide service for 20 years. (correct your final answer to 3 decimal places)