Case Type: operations strategy; math problem.
Consulting Firm: IBM Global Business Services final round job interview.
Industry Coverage: transportation.
Case Interview Question #00174: You have a friend who is a taxi cab operator (not the cab owner) in Chicago and he is asking for your help in assessing a situation: After dropping off customers at Chicago O’Hare International Airport (ORD), the taxi driver has 2 choices:
1. Stay at O’Hare and wait in the queue for 2 hours to take a customer back into the city.
2. Go directly back to the city and conduct business.
Your taxi driver friend wants to determine which one is the better option. What would you recommend and why?
Note to Interviewer: At this stage, ask the interviewee to brain storm how he/she would approach the problem. Seek a broad level understanding of the different issues that should be addressed. This case is meant to be very interactive and you need to ask the candidate very often for his/her thoughts. After a short brainstorming session and an introduction of the framework, the candidate should ask for the following facts specifically. If he/she does not think of one, help them reach it by asking questions that will lead to it.
Additional Information: (to be given to you if asked)
- Distance: The distance of the trip between O’Hare International Airport and Downtown Chicago is approximately 20 miles, and the trip is all highway
- Operation Revenues: $4 for the first mile, and $2 for every subsequent mile, tips = 15% of total meter.
- Operation Costs:
- Current gas price is $3/gallon, the cab’s gasoline consumption is 25 miles/gallon when driving on the highway and 20 miles/gallon in the city.
- 50% meter revenue goes to the cab owner.
- When waiting in the queue, assume no gas is consumed.
- The toll for a one-way trip is $3.
Possible Answer:
Once we calculated that the two options yield about the same profit (money wise), others things to consider to make final decision:
- Low risk and steady reward or High risk and possible high return. The profit of going back will vary more than to stay. If the cab driver go back and get more than average riders, he makes a big profit. But if he go back and not have a good day, he makes a big loss.
- Expected demand on any particular days and time. On average, going back will produce the same net profit with staying. But the demand will vary by date and time. If the cab driver can beat the competitors (other cab drivers) in predicting the demand, he will find courses of actions that greatly favor him. Those possible reasons that make demand different than the average are: rains, rush hours, special events, holidays…
I agree with the cost benefit analysis approach to the problem but I wonder why the author of the case did not consider the opportunity cost in addition to the operational cost. While the driver is waiting in queue for 2 hrs isnt he loosing $24.8 and when he opts to drive back he is not loosing the $24.8, assuming he gets a ride back to the airport.
So in that case its better to drive back to the city because the staying back approach results in almost zero net profit ($24.9 revenue – $24.8 opportunity cost).
Also can anybody explain what the microeconomic analysis would be ? Is it the Total economic surplus (driver’s + consumer surplus)generated by one option over the other ?