Reference no: EM132592869
The companies Uber and Lyft make up the vast majority of market share for ride sharing services. While it may seem strange then to model this market as perfectly competitive, neither of these firms have posted a profit
Suppose that aggregate demand for ride sharing services in Boston is given by Q = 20 - P
where Q is in thousands of trips per day, and P is the average price per trip in dollars. Suppose that Uber and Lyft both have identical (short run) cost functions given by C(q) = 25 + q^2
a) Find the long-run equilibrium price P and market quantity Q. What is the quantity of (thousands of) trips q provided by each company? Draw the average cost and supply curve for one of the companies, marking P and q on your graph.
b) A disease caused by a highly contagious virus hits Boston residents. The ensuing quarantine shifts the demand for ride share services. The new demand is Q = 15 - P. What is the profit maximizing (or loss minimizing) choice of q for Uber and Lyft? Use this condition to propose a short run aggregate supply curve for the ride share market, and find the resulting equilibrium price P and quantity Q.
Is this aggregate supply curve valid - i.e., is it worthwhile for Uber and Lyft to continue to operate in the short run, or should they shut down? Explain your reasoning.
c) Suppose that in addition to consumers becoming wary of riding in a vehicle 3 feet from the driver (and perhaps other passengers), drivers require additional hazard pay to compensate them for taking on increased risk, and the cost functions for the companies become C(q) = 16 + 3q^2 Redo the short-run analysis from part b) incorporating this new cost function.
d) After months, it has become apparent that the virus will remain in Boston for the foreseeable future. Does either ride share company exit? (Assume that neither company is considering the behavior of the other company in making its decision.) Explain the reasoning in their decision.
e) Suppose that (for whatever reason) Uber exits the market. Assume that its cost structure is C(q) = 25 + q^2 and that aggregate demand is Q = 15 - P as in part b). At what price P would Lyft find it just worthwhile to remain in business in the long run? Will the market "clear" at this price (quantity supplied equal quantity demand)? Comment on what explains your findings for both of these questions.