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Uber is a service that matches private drivers to passengers that areseeking a ride from one place to another.

Question 2Read attachment 2a. Uber is a service that matches private drivers to passengers that areseeking a ride from one place to another. Assume that the market for Uber rides is perfectlycompetitive.a) Suppose that the market for Uber rides is initially in equilibrium. According to the article,what happens to the demand and supply for Uber rides during snow storms? Suppose Uberalways charges the same price per kilometre travelled independent of the circumstances. Isthe market still in equilibrium? Explain using the demand/supply model with diagrams. (2marks)b) Now consider the surge pricing that Uber uses during busy times. According to Uber’schief executive, surge pricing is ‘necessary to give more drivers an incentive to get ontostorm-ravaged roads and squeeze through traffic to pick up people for rides.’ Do you agreewith this statement? How would the use of surge pricing affect the market outcome on a daywhen there is a snow storm? Explain using the demand/supply model with diagrams. (1mark)c) In general, are consumers better or worse off with surge pricing, as compared to the casewithout surge pricing? Consider two different types of consumers: (i) the group of consumerswho would have gotten an Uber ride without surge pricing; and (ii) the group of consumerswho can only get an Uber ride with surge pricing, but not without. How does surge pricingaffect the welfare of these two groups of consumers? Explain using the demand/supply modelwith diagrams. (2 marks)d) Read attachment 2b. According to the article, Uber has agreed to cap its surge pricingpolicy ‘during natural disasters and states of emergency’. What kind of market intervention isthis? How does this affect the price and quantity traded of Uber rides? Explain using thedemand/supply model with diagrams. (1 mark)

Attachment 2b‘Ride-hailing service Uber has agreed to stop raising prices substantially during naturaldisasters and states of emergency, the company announced today. The policy, through whichUber charges more when there is increased demand for its private cars, had previously earnedthe start-up the ire of customers during disasters like Hurricane Sandy and a harsh winterstorm in New York. The company has previously claimed that increasing prices helpsconvince more drivers to go out on the road and accept fares during a storm…. Under thenew terms, Uber has agreed to cap its prices during emergencies and disasters….’(‘Uber agrees to limit surge pricing during emergencies, disasters’, Time, 8 July 2014)

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