Practice Case #1

Question: How much does a NYC cab driver make in a day?

This question asks for what a cab driver “makes.” It’s important to note that this is not the same thing as revenue. Since the driver has expenses, what he / she actually “makes” is the revenue net of cost. Thus, it makes sense to break the case into revenues and costs.

Revenues: You should begin by calculating the demand for a driver’s services. One way to do this is to make a simple assumption about the number of fares they will have during the day and the average amount of money they will make on each. That’s an easy way to start, but let’s consider a few more complex approaches.

Moving beyond overall averages, consider breaking the day into distinct chunks (“segments”). The value of using a segmentation framework is that you can make more reasonable assumptions about each of the individual segments. But be careful not to overdo it-you can easily break the day down into so many pieces that the problem becomes unwieldy.

For this question, you can break the day down by times of day (e.g., rush hour versus non-rush hour), by length of rides (e.g., short trips versus long trips), or by some other meaningful dimension. Your choice about what you consider to be meaningful is something your interviewer will be paying attention to. In this case, we might assume that the number of fares per hour and their amount would vary throughout the day. The assumptions you make about each segment will also be important, and can provide the basis for discussion about your answer, particularly if it doesn’t look “right.” (Extra credit if you included tips in revenue considerations)

Once you’ve planned out a segmentation scheme, it is simply arithmetic to aggregate up revenues by segment to get part-ways to your answer.

Costs: It’s a good idea to list all of the likely costs for the driver and estimate what they would amount to for a day on the street. Material costs might include:

• Car and Medallion rental (if not owner)
• Depreciation of Car and Medallion (if owner)
• Gas
• Insurance
• Taxes

Some of these figures are not well known by everyone. You need to be able to make reasonable estimates, and regularly check your estimates for consistency and rationality while solving the case. It is expected that these estimates be reasonable (gas is not $10 a gallon!), so use information you do know to support your answer.

Aggregating all of these costs for a day will leave you with a total daily cost number, which can be subtracted from revenue to yield the day's profits (i.e., what they "make").

Reasonability Check: One way to double-check your answer is to annualize your daily number. Assume that the cab driver works X days a week and Y weeks a year and calculate the driver's annual pay. If it is $5K, you are probably too low, and if it is$1million, you are either too high or interviewing for the wrong job. Another good consideration would be to determine whether there is enough demand at normal prices to generate the revenue.

No matter how you solve the problem, your interviewer will be looking for a reasonability check. Don't wait to be asked.

Answer

The correct answer turns out to be in the $125-$175 range, at least in the New York City area.