Group Assignment 2

Navya Mannengi, Gowri Akarapu, James Baier, Jared Doerfler, Tom Holubar

Question 1:

You are a financial consultant engaged by Uber. Suppose that Uber wants to encourage drivers to
lease “Covid-19 enhanced” vehicles. These vehicles will raise drivers’ fixed costs. You will need
to compute driver profit, both before the change and with a Covid-19 enhanced vehicle. Uber
gives you the following average data from its riders:

Fare #trips/day cost/mile miles/trip Fixed cost/day Driver split

$20 24 $.50 8 $54 0.7

Note: The driver split means that the driver gets 70% of the fare and Uber gets 30%.

A. Revenue is income generated by a business, usually from the sale of its goods or services to
consumers. Broken down further, total revenue = total receipts of a sale of a good or service
(Price x Quantity, P*Q).

Total cost is the sum of all costs of producing the goods/services. You can calculate the total cost
by adding Total Variable Costs + Total Fixed Cost, TVC + TFC. Variable costs vary with the level
of output, while fixed costs do not depend on the level of output.

Profit is a valuable return, or gain. Broken down further, profit is the total revenue - total economic
cost, TR - TC.

B. Calculate the following:

a. Revenue = P*Q = 20 * 24 * 0.7 = $336
b. Total variable cost = VC * Q = (0.5 * 8) * 24 = $96
c. Total fixed cost = $54
d. Total cost = TVC + TFC = $96 + $54 = $150
e. Driver’s daily profit = TR - TC = $336 - $150 = $186

C. Now suppose that the driver’s fixed cost increases to $120 per day for a Covid-19 vehicle, which
includes a superior air filtration system and cleaning. All else in the table remains the same. The
driver's revenue and variable cost do not change.
a. Calculate the new total cost.

= Fixed cost + Variable Cost

= 120 + 96

= 216

b. Calculate the new driver daily profit.

= (TR * 0.7) - New TC

= (480 * 0.7) - 216

= 120
 D. In Iowa the state minimum wage is $7.25 per hour. Assume an 8-hour day. Is the driver likely to
work for Uber or take a minimum wage job based solely on the data in this problem?

Answer: Driver’s daily profit during normal days is $186. If he works with minimum wage, his
earnings per day will be $58 (7.25 * 8). Though the driver's daily profit reduced to $120 with
Covid-19 enhanced vehicles, it is more than what the earning will be with minimum wage. Driver
would likely be working for Uber.

What if the minimum wage rises to $15 per hour?

Answer: If the minimum wage rises to $15, daily earnings will be $120 (15*8). This is the same
as the drivers profit with new total cost. In this case, the driver can pick any one of the jobs.

E. What other factors would affect the individual’s decision to drive versus take a minimum wage
job?

With the above numbers it is evident that the driver can earn more by driving Uber than working 8
hours a day at a minimum wage. Driver has an option to increase the number of trips per day
which will increase the revenue. Since fixed costs can’t be changed, the driver can try to reduce
the cost per mile which will help in reducing the variable cost. Things that would impact the
driver’s daily profit negatively are weather or vehicle breakdown would reduce the number of trips
and increase in gas prices will make the cost/mile go up. Assuming that there is flexibility and the
driver can make 30 trips per day with 10 miles per trip, keeping all else the same, the driver can
earn almost double during normal days than with a $15/hr job for 8 hours.

Question 2:

Please complete the following short answer question. You are faced with two choices with a
guaranteed return. You have the option to put $2 million in a:

1. fund with a 10% return.

2. bank with a 1% return.

Will you choose A or B? Hint: Calculate the opportunity cost. Please use the definition of
opportunity cost from lecture.

We will choose Option A.

Opportunity Cost = returns of a possible option - returns of a chosen option

= $2MM*0.01 - $2MM*0.1

= $20,000-$200,000

= -$180,000

Negative opportunity cost would suggest the correct choice has been made since there is no loss of
additional returns by selecting the chosen option. Particularly without additional variables such as fees,
rate of return, etc.
Question 3

1. In a competitive market the price must be:

a. Less than the Marginal Cost
b. Bigger than the Marginal Cost.
c. Equal to the Marginal Cost.

2. The value of the next best alternative is an example of

a. None of the above
b. Opportunity cost
c. Average cost
d. Marginal cost

3. The competitive equilibrium can be obtained as:

a. Intersection of the MR and MC
b. None of the above
c. Intersection of S and D
d. Intersection of MR and AC

Question 4:

What is the WTO? What does the WTO do? See the link:

The World Trade Organization (WTO) is an international organization whose objective is open trade for
the benefit of its member countries. The WTO ensures a level playing field for all members and acts as a
liaison to negotiate trade deals between member countries. The WTO can provide legal framework to
settle disputes between countries. The WTO was established in 1995 and has 117 members. The WTO
has 700 support staff and is located in Geneva Switzerland. In summation, the WTO is an independent,
unbiased, internally composed organization that promotes open trade between member countries as well
as a legal framework to make sure the laws of the signed agreements are followed by each member.

What are 10 things the WTO says trade can do? Please list the benefits and very briefly
summarize the arguments given on the link.

1. Cut living costs and raise living standards

a. The WTO states that protectionism is expensive and the WTO promotes trade to reduce
protectionism within countries that can lower the cost of living. They also state that overall
incomes can rise, food is more cost effective and overall goods are more affordable with
trade.
2. Settle disputes and reduce trade tensions
a. Like most things in life, closer relationships provide benefits. The WTO promotes trade
relationships with countries and that ultimately leads to reduced trade tensions. WTO
trade disputes are based on WTO agreements, which means there is a clear right and
wrong. Interestingly, the more disputes brought to the WTO mean the opposite of what
you might be thinking, it means the world has come closer together in trade which leads
us to many positives within the world.
3. Stimulate economic growth and employment
a. Open economies tend to grow faster and be less volatile. Competition is powerful in the
marketplace and will lead to more innovation and reduced prices thus this can stimulate
growth and employment. There is data to suggest that imports and jobless rate may have
 been linked from 1970 - 1990, since the WTO opened in the mid 90’s, it appears the two
are no longer linked, a positive.
4. Cut the cost of doing business internationally
a. The WTO can cut the cost of doing business internationally due to the rules they have in
their agreements. If we didn’t have the WTO, countries could set different taxes on
imported goods, thus making it extremely difficult for organizations with international
supply chains to do business internationally.
5. Encourage good governance
a. Many of the WTO trade agreements encourage good government and help reduce
corruption. The WTO provides transparency, this leads to greater harmony between the
WTO members. Member countries can also use WTO trade agreements to ward off
unwise offers that may be considered corrupt.
6. Help countries develop
a. All WTO agreements have special provisions for developing countries that enable them
to grow. This includes longer periods to implement agreements, measures to help them
build infrastructure. The WTO does not increase trade flows, but offers opportunities.
7. Give the weak a stronger voice
a. All countries that are members of the WTO, no matter how big or small or powerful or
weak, agree to the same agreements. Being that smaller or developing countries sign
and execute the same agreements that larger, developed countries, this provides a level
playing field and gives the weak a stronger voice.
8. Support the environment and health
a. An example of this is the pharmaceutical supply chain. The TRIPS agreement is about
balance. It protects inventors rights for a limited period of time to encourage international
research. It also allows governments room to provide treatments that are more
affordable.
9. Contribute to peace and stability
a. Protectionism is not good for economies. This is evident in 1929 versus 1933 during the
Great Depression and after certain tariffs were implemented. When the world economy is
volatile, the trading system the WTO promotes can contribute to stability, this can lead to
international peace.
10. Be effective without hitting the headlines
a. The signed agreement is only the start between member countries in the WTO. There are
years ahead where the WTO needs to monitor these agreements after the agreements
are signed. The saying “no news, is good news” applies to the WTO after the agreements
are signed. For example, they monitor our food in the supply chain, they provide IP
protection, trim red tape, etc. after agreements are signed. If headlines aren’t written
about member countries after an agreement is signed, it means the WTO is effective at
doing their job of promoting global trade.

Note: When you click on the link, more information about what the WTO does and its benefits are
explained: https://www.wto.org/english/thewto_e/whatis_e/10thi_e/10thi00_e.htm