MGMAT CAT Taxi Problem

[CoralT842]

Tabs are included below. This problem included a Yes/No statement section that asked about fares.

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.

The explanation of the answer says that we're told this is constant (the same under both systems). I can't find this information in the tabs! How was this determined?

Thanks in advance!

Tab 1
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.

Tab 2
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.

Tab 3
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.

[Sage Pearce-Higgins]

Very good point. The question is still correct, but that looks like an error in our explanation. Thanks for pointing it out.