Question

Ms. Claire , is a Liberian entrepreneur who is interested in starting a ride hailing company like Uber. She intends to go with the name “Allons-y”(pronounced allonzee).She is however new to this ride hailing business.For technical opinion, she consults you, an economics student to help her identify and classify the principal cost elements she should expect to incur.(a)Identify at least ten(10)principal cost items (expenditure) associated with setting up and operating this ride hailing business.[5 marks](b)Classify with explanation,the identified costs under Fixed or Variable costs.[5 marks](c)Advise Ms. Claire what to consider when she is deciding to employ an additional administrative worker.[5 marks](d)Assume that the only resources required by Ms. Claire labour and Capital. Complete the table that follows,provided the wage for each worker is $100and the required capital is estimated at $10,000.[5 marks] e)Explain two factors that would influence the price elasticity of demand for Allons-y. [5 marks](f)Suppose Claire begins operations and is faced by a downwardsteep-sloping market demand curve.Also,from her costs schedule in(d)above,it is established thather willingness to sell conforms to an upward sloping market supply curve.The taxi union in a petition to the government argues that ride hailing services are exempted from certain commercial vehicle levies and as result ride hailing service operators charge a lower price than the taxi operators.The union therefore requests the government to correct this unfair advantage.In response to the petition,the government is deciding to impose a unit tax of $2perrideonridehailingservices.To what extent would the imposition of the unit tax address the problem raised by the taxi

Answer 1

Answer-a) 10 Principal cost items:

1. Office building cost
2. Office working staff salary
3. Ride hailing software cost
4. Ride hailing software maintenance & update cost
5. Payment gateway cost
6. Driver’s commission
7. Legal license fees
8. Advertising cost
9. Consultant fees (tax consultant, business consultants)
10. Interest cost on investment

Answer-b)

Sr. No.	Principle Expenditute	Classification of Cost	Explanation of Classification
1	Office building cost	Fixed	Invested only at start of business
2	Office working staff salary	Variable	Paid every week / month
3	Ride hailing software cost	Fixed	Invested only at start of business
4	Ride hailing software maintenance & update cost	Variable	Paid as per contract condition with software OEM
5	Payment gateway cost	Variable	Paid for each transaction
6	Driver’s commission	Variable	paid for each ride
7	Legal license fees	Variable	paid during license validy extesion
8	Advertising cost	Variable	Paid as per requirement
9	Consultant fees (tax consultant, business consultants)	Variable	Paid every consultation
10	Interest cost on investment	Variable	Paid monthly/ yearly basis

Answer-c) Additional Admistritive worker must have rich experiance in ride hailing sector in administrative work and insted of total fixed salery, major part of salary should depend upon workers performance.

Answer-d) Table which is to be completed is not provided in question, thus cannot be answered.

Answer-e) Two factors that would influence the price elasticity of demand for Allons-y:

1. Government fare cut in public transport: Due to this fall in fare of public transport, demand of ride hailing service will fall. This will affect price elasticity in negative direction by change in quantity of demand which is numerator component of price elasticity.
2. Rise in fuel prices will increase the per ride cost. Thus widen the change in price factor of elasticity of demand (denominator).

Answer-f) As ride hailing services are exempted from certain commercial vehicle levies, their operating cost is lower than taxi operators. Due to this ride hailing service operators are capturing more market share as compare to taxi operators. This low operating cost advantage is incentivizing more to ride hailing service operators and Ms. Claire is willing to supply more and more in market due to this incentive. This is resulting in upward sloping of market supply curve.

But due to $2 per ride tax imposition, unfair advantage to ride hailing service stopped. Now Ms. Claire operating cost rises and profit reduced as compare to earlier. Now Ms. Claire will not show much willingness to sell more and more service. Due to this market supply curve will becomes flatter as compare to earlier rising upward.