Should Cab Driver Stay in O’Hare or Go Back to City?

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:

The variable cost for a one way trip (Gas) is: ($3/gallon) x (20 miles) / (25 miles/gallon) = $2.4. Assume all other costs i.e. maintenance etc., are negligible.

Option #1 Cost/Benefit Analysis: Waiting in O’Hare Airport

• Revenues: meter $4 + $2×19 = $42, tips $42 x 15% = $6.3, $48.3 in total
• Costs: – $21 (half the meter to cab owner) – $2.4 (Gas for trip from O’Hare to city) = -$23.6
• Profit: $48.3 – $23.6 = $24.9

Option #2 Cost/Benefit Analysis: Going back to the City
There is no right answer here — any reasonable assumption would do. Try to gauge the interviewee on what he/she thinks is appropriate.

Assume 40 minutes ride from O’Hare to Downtown Chicago (lost). In the remaining 80 minutes we assume the cab driver to have 6 rides. The candidate can set up a table like this to structure the calculations:

We also assume the cab will be driving a total of 10 miles around Chicago downtwon looking for customers.

• Revenues: meter $52 + tips $7.8 = $59.8
• Costs: – $2.4 (Gas for trip from O’Hare to city) – $3 (Tollway) – $26 (half the meter) – $3.6 ($1.5 gas for driving around for 10 miles looking for customers + $2.1 driving customers for 14 miles) = -$25
• Profit: $59.8 – $25 = $24.8

Conclusion: In both scenarios, the taxi driver will earn about $25. In recommending one approach, we believe it is better to wait in the queue so that the taxi driver can use the 2 hours to do other things (i.e. study, relax). Also, there is less risk involved with less miles driven, and extended life of cab, reduced maintenance costs etc.

Note: An especially excellent answer would also address the a microeconomic stand point of this equilibrium, especially if the numbers of the two options don’t match in the interviewee’s calculation.