Excerpts from report from consultant to city official, dated August 12

Question

Excerpts from report from consultant to city official, dated August 12 
 
The pilot program to install credit card readers and LCD screens in a small number of city taxis has been a qualified success. Initially, drivers worried about the 3% processing fee per transaction (levied on both fare and tip), while the taxi companies were concerned about the ability of riders to contest charges, as well as possible reliability issues leading to high maintenance costs.
 
Nevertheless, once the systems were in place, drivers were pleased by the average increase in tips from 10% to 25% (added to the fare), while the potential for additional advertising revenue (via the screens) thrilled the companies.
 
Since the pilot program paid for installation, it's unclear how taxi companies will react to the $450 installation cost once they must pay it. I would hazard that this cost will pose a significant obstacle to widespread adoption, despite the eventual economic benefits of the readers and screens. It should be noted, though, that none of the pilot participants returned the systems after the program; all signed up for zero-interest plans to pay back the installation cost over 6 months.Email from city official to commissioner, dated August 13 
 
Please see the attached report about the credit card pilot program, which exceeded expectations.
 
I propose that we use our left-over economic development grant money to directly subsidize the installation of these credit card readers in all licensed taxis. For one, there will be much better tax reporting of tips and of fares themselves. We will also be able to provide numerous additional services to riders (both residents and visitors), such as maps showing the cab’s position in real time.Commissioner’s emailed reply to city official, dated August 14 
 
Thanks for forwarding that report. I doubt that the card readers would improve tax reporting of fares, which are already recorded by meters. We get the data from operating meters every day. If the meter is turned off, the driver can only accept an illegal fare—which would be in cash.
 
That said, your other points and those of the consultant are well taken. In fact, I think there’s such a strong economic incentive to adopt the readers & screens that we don’t need to subsidize installation. I’d rather work with local banks to arrange at-cost loans for companies to install the systems in their fleets. Average loan sizes should be minimal, $6,000 per company to cover the full cost for the average fleet; plus, with interest rates so low, borrowing costs should be trivial.

suburbMBA · Answer

For Question 2(c), does the commissioner not explicitly say that he has doubts over the ability of card readers to improve tax reporting of fares? Why is the answer YES? Is there something to be inferred from his next sentence that I've missed?

pratikshyasuar · Answer

bhanu29  Could you post the solution for Question 1?

bhanu29 · Answer

The increase in tip percentage from 10% to 25% is 15%. On a $20 fare, 15% is $3. The transaction fee of 3% is levied on both fare and tip ($20 + 25%, or $5, for a total of $25), and 3% of $25 is $0.75. Thus, the increase in tips, less the transaction fee, is $3 – $0.75 = $2.25.

To cover a $450 installation cost, you divide $450 by $2.25 to get 200 fares.

Statement 1:  Yes.  The city official does not cite any of the benefits described in the report. The consultant discusses how the new systems benefit drivers and taxi companies. In contrast, the city official only mentions how the new systems could benefit the city government (better tax collections) and riders.

Statement 2:  No .  You know that the potential for advertising revenue (through the screens) interests the companies (in fact, it “thrilled” them), but you aren’t told whether this interests the  drivers.

Statement 3: Yes. The commissioner only disagrees with the official’s expectation that tax reporting of fares would improve. In fact, the commissioner makes this contrast very explicit by emphasizing the word fares, and then goes on to say that “your other points... are well taken.” So you can conclude that the commissioner also expects that tax reporting of tips would improve with the new systems. (The official has already come out and said as much.)

Statement 1:  No.  Call a fare  F  . Under the old system, the pre-tax revenue per fare is  F  + 10% of  F , or 1.1  F.

Under the new system, the pre-tax revenue per fare seems to be  F  + 25%, or 1.25  F,  but then you have to subtract 3%, or multiply by 0.97: 
 1.25  F (0.97) = 1.2125  F .

Now, you have to figure out how much greater (percent-wise) this second number is than the first. What percent increase gets you from 1.1  F  to 1.2125  F ? The answer is ~10.2% (1.12125 divided by 1.1 is 1.10227..), which is NOT greater than 11%.

Statement 2:  Yes.  The commissioner specifically says that “if the meter is turned off, the driver can only accept an illegal fare.” In other words, all fares that are accepted with the meter turned  off  are illegal. So then you have to turn the meter  on  for a fare to be legal. Doing so doesn’t guarantee that a fare is legal (there are probably ways to have an illegal fare happen with the meter on), but you can’t have a legal fare without the meter on.

Statement 3:  No.  The average loan size that the commissioner predicts is $6,000—that’s the amount to cover “the full cost for the average fleet.” Since the installation cost is $450, the average fleet size must be $6,000 divided by $450, or 13.3 taxis. This number is not greater than 15 taxis.

ParamjitDasGMAT · Answer

Hi  suburbMBA

I am happy to help.

2(c) is about improved reporting of  tips . The commissioner has doubts over improved reporting of   fares   (a subtle difference), but he agrees on the other points (which would include improved reporting of tips, the ability to share the live location of a driver, and so on).

agrasan · Answer

Hi  ParamjitDasGMAT

Could you please help me with 2(a) -   In making his or her case to subsidize installations, the city official cites none of the benefits described in the report?

My reasoning is that the city council does highlight advantages    "  I propose that we use our left-over economic development grant money to directly subsidize the installation of these credit card readers in all licensed taxis.     For one, there will be much better tax reporting of tips and of fares themselves. We will also be able to provide numerous additional services to riders (both residents and visitors), such as maps showing the cab’s position in real time."

Please let me know where I am going wrong here.

ParamjitDasGMAT · Answer

Sure,  agrasan ,

So the benefits are mentioned - absolutely correct. But the   benefits highlighted in Tab 1  , mostly to do with increased revenues (fares and tips) aren't mentioned in the city official's email.

Hope this helps. Let me know if anything is unclear.

pizzapalooza · Answer

The first question explicitly states  "   solely from the increase in tips" , then why do we also look at the change from the 3% processing fee applied on fares to get to the right answer i.e. 200?
 Ideally shouldn't it be 5*0.97 - 2 i.e. 2.85 (Increase only from tips)
vs 25*0.97 - 22 i.e. 2.25

Only when I consider 450/2.25 do I get 200, which has been provided as the correct answer to this question.

egmat · Answer

Hi pizzapalooza,

Your reading of "solely from the increase in tips" is actually right about one thing: the only  revenue  gain we count is the jump in tips ($ 2  → $ 5 , i.e. +$ 3 ). We don't add advertising revenue or anything else. So you've correctly isolated the revenue side.

The catch is that the phrase governs  which gains to count  - not  which costs to ignore . And the  3%  fee is a  cost . The  Report tab  is explicit: the fee is "levied on both fare and tip"  per transaction . Once a card reader is installed, the whole $ 25  runs through it, so the fee is  3%  × $ 25  = $ 0.75  - which includes $ 0.60  on the fare.

Here's the part that resolves your doubt:  before installation, fares were paid in cash, so there was no fee at all.  Installing the reader is what  creates  the $ 0.60  fare-side fee. That $ 0.60  is a brand-new cost caused by the very system the tip increase is supposed to pay off - so it has to come out of the gain.

Your math, with the missing piece added:

- Your number: $ 5  ×  0.97  − $ 2  = $ 2.85  (fee applied only to the tip)
- What's missing: the  new  fee on the fare, $ 20  ×  0.03  = $ 0.60 
- Net gain per fare: $ 2.85  - $ 0.60  = $ 2.25

Therefore  $ 450  ÷ $ 2.25  =  200 .

So "solely from tips" is telling you to leave out other revenue streams (ads, services) - not to pretend the fare-side fee doesn't exist. That fee is an unavoidable cost of switching the fare to a card, so it correctly nets against the tip gain.

Answer: 200

	200
	225
	250
	275
	300

YES	NO
		In making his or her case to subsidize installations, the city official cites none of the benefits described in the report.
		The potential use of the LCD screens as an advertising medium is of interest to both drivers and taxi companies.
		Both the city official and the commissioner expect that tax reporting of tips would improve with the new systems.

YES	NO
		Even after deduction of the transaction fee, the average pre-tax revenue per fare (including tips) is more than 11% higher with the new card readers than before.
		For a taxi fare to be legal, the meter must be turned on.
		The average fleet size per company is greater than 15 taxis.

	[color=#000000]200[/color]
	[color=#000000]225[/color]
	[color=#000000]250[/color]
	[color=#000000]275[/color]
	[color=#000000]300[/color]

[color=#ffffff][color=#000000]YES[/color][/color]	[color=#ffffff][color=#000000]NO[/color][/color]
		[color=#ffffff][color=#000000]In making his or her case to subsidize installations, the city official cites none of the benefits described in the report.[/color][/color]
		[color=#ffffff][color=#000000]The potential use of the LCD screens as an advertising medium is of interest to both drivers and taxi companies.[/color][/color]
		[color=#ffffff][color=#000000]Both the city official and the commissioner expect that tax reporting of tips would improve with the new systems.[/color][/color]

Excerpts from report from consultant to city official, dated August 12

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[color=#ffffff][color=#000000]YES[/color][/color]	[color=#ffffff][color=#000000]NO[/color][/color]
		[color=#ffffff][color=#000000]Even after deduction of the transaction fee, the average pre-tax revenue per fare (including tips) is more than 11% higher with the new card readers than before.[/color][/color]
		[color=#ffffff][color=#000000]For a taxi fare to be legal, the meter must be turned on.[/color][/color]
		[color=#ffffff][color=#000000]The average fleet size per company is greater than 15 taxis.[/color][/color]

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Excerpts from report from consultant to city official, dated August 12

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