Question

The demand curve for Uber weekday rides in certain city is described by the following equation: \(Q=50-P .\) An average ride costs \(\$ 25 .\) However during weekend nights the demand for rides increases dramatically and thus the new demand curve is: \(Q=100-P .\) As a result, Uber implements a surge price that is twice the price of an average ride, or \(\$ 50\) a. Graph the demand curves and determine the quantity of rides demanded during weekdays and on weekend nights based on the above prices. Label the graph with the prices and quantities. b. Now imagine that Uber riders are only willing to pay up to \(\$ 40\) instead of \(\$ 50\) during surge hours. Explain the reasoning behind this consumer behavior and draw the new demand curve for weekend nights. Can Uber still charge the surge price of \(\$ 50 ?\) c. Does this change in the demand curve affect Uber's profits during weekend nights? If so, what is the overall gain or loss?

Short answer

The quantity demanded during weekdays and weekend nights is obtained by evaluating the price at the respective points on the demand curves. The willingness of riders to pay a lesser amount during surge hours results in a lower revenue and hence can potentially decrease Uber's profits during this period. Yes, Uber could still charge the $50 surge price, but it would sell fewer rides and potentially lose customers to competition. Therefore, they might need to think about their pricing strategy to maximize profits while being competitively priced.

Step-by-step solution

Create the Demand Graph for Weekdays

The equation given for the demand curve during weekdays is 'Q=50-P'. Using the standard graphing practice, assign the quantity 'Q' on the y-axis and price 'P' on the x-axis. For each price, calculate the quantity 'Q' using the equation and plot the points on the graph. Connect these points to form the demand curve.

Create the Demand Graph for Weekend Nights

For weekend nights, the equation given for the demand curve is 'Q=100-P'. Just like the weekday analysis, plot these points on the graph and connect them to form the demand curve.

Determine the Rides Demanded on Weekdays and Weekend Nights

Based on the graph, find the points where 'P' is $25 and $50, as these are the prices for an average ride and surge pricing, respectively.

Analyze Surge Pricing

For the given surge price of $50, verify whether any points on the weekend demand curve exist at this price. If there are, this signifies that the consumers are willing to pay the surge price.

Analyze Change in Consumer Behavior

Now, to analyze the scenario where the maximum price riders are willing to pay during surge hours is reduced to $40, reduce the price on the demand curve for weekend nights and observe the resultant quantity. This shows what would the demand look like if Uber were to reduce its surge price.

Analyze Impact on Profits

To understand the effect on Uber's profits during surge hours, compare the total revenue generated at price $40 and $50. The total revenue is calculated as price times quantity. If the revenue at $40 is less than the revenue at $50, this signifies a loss in Uber's profits during surge hours.

Key concepts

Microeconomics

Microeconomics is a branch of economics that examines the economic behavior of individuals, households, and firms to understand how they make decisions about resource allocation and the prices of goods and services. It's concerned with the interactions between individual buyers and sellers and the factors that influence their choices.

At its core, microeconomics looks at supply and demand in individual markets, such as the market for Uber rides in a city. The demand curve, a fundamental concept in microeconomics, represents the relationship between price and the quantity of a good or service that consumers are willing and able to purchase at various prices. For example, the demand curve for Uber weekday rides is given by the equation \(Q=50-P\), where \(Q\) is the quantity of rides demanded, and \(P\) is the price per ride. As the price increases, the quantity demanded generally decreases, and vice versa, illustrating the law of demand. Understanding how demand curves shift in response to changes in prices and other factors is crucial in microeconomics, as it helps predict consumer behavior and market outcomes.

Price Elasticity of Demand

The concept of price elasticity of demand is a key aspect of demand curve analysis. It measures how sensitive the quantity demanded of a good or service is to a change in its price. If a small change in price leads to a significant change in the quantity demanded, the demand is said to be elastic. Conversely, if a substantial change in price has only a modest impact on the quantity demanded, the demand is inelastic.

For instance, during weekend nights, the demand curve for Uber rides shifts to \(Q=100-P\), implying that for each dollar increase in price, one less ride is demanded. This change suggests that consumers are more responsive to price changes during periods of high demand. Price elasticity plays a pivotal role in a company's pricing strategy, as it influences revenue and profitability. If Uber raises prices and faces elastic demand, they could potentially lose more in the quantity of rides sold than they gain from the higher price, thus affecting their overall revenue.

Consumer Behavior

Consumer behavior examines the reasons behind consumers' decisions to purchase goods or services and how they use and dispose of them. It involves preferences, purchasing power, and the overall consumer experience, including psychological, social, and emotional factors.

In the Uber pricing scenario, consumer behavior can be analyzed through the willingness to pay during surge pricing periods. If consumers are only willing to pay up to \(\(40\), instead of \(\)50\), during weekend surge hours, it might be due to perceived fairness or available alternatives. Such behavior indicates that consumers are price-sensitive and might switch to other forms of transport if Uber prices exceed their willingness to pay. This change in the demand curve to reflect a maximum price of \($40\) will directly impact Uber's profits. As a company, Uber must take into account this behavior to adjust pricing strategies to maximize profits without losing customers to the competition.