Name LOVE VERMA

Question 1

Answer for Part1 A here.

The phenomenon which involves such decision making is called collusion.

The following are the advantages and disadvantages

Advantages:

1. Assurance of profits: Members are assured of reasonable profit margins as they

charge prices which are more than the cost of production and distribution .
2. Monopoly power: Cartels are able to enjoy monopoly power as they can restrict
competition . Products can be sold at higher profits to maximize profits.
3. Marketing economics: Since goods and services are offered a sone non differentiated
product offering, competitive pricing or product placement. Is not followed.
4. Production efficiency: cartel markets the product therefore manufacturer solely
focuses on production.
5. Economies of Scale :The cartel can produce and deal in bulk thereby negotiation
power is increased.
6. Withstand business cycle: A cartel can withstand adverse affects of business cycle.
They can regulate their output and influence the price.
DISADVANTAGES
1. Lack of stability : cartels are voluntary associations and do not have complete
control over their members.
2. Inability to stabilize demand: Ineffective in stabilizing demand as there is far more
fluctuation.
3. Protection to inefficient firms: No efficiency as there is no incentive for innovation
and cost plus pricing model is followed.
 4. Monopoly adversity : customers are adversely impacted due to monopoly of cartels

answer for Part1 B here.

As per the report soon after the supply shock the world encountered demand shock which
reduced the prices of oil to lowest levels since 2003 .Then by May 2020 the benchmark index
fell into negatives which implies that people would pay to get rid of the oil, observing this
scenario in the market OPEC decided to trim the production of oil.

The demand curve was moving leftward as the demand decreased however in absence of
consensus between OPEC members and other oil producing nations , they kept on producing
oil thereby moving the supply curve on the right slightly thus equilibrium price point changed
to lower point..

However after OPEC cut production the supply curve leaned leftwards and the demand curve
moved rightwards as OPEC hoped to gain more from demand and prices became high .

Here equilibrium price changes at a higher point thereby increasing the prices

answer for Part C here.

The OPEC Operates in an oligopoly market structure, a structure where in a few firms
dominate. When a market is shared between few firms it is then bound to be highly
concentrated.

Types of collusion:

1. Overt: Here there is no attempt to hide agreements, such as when firms form trade
associations.
2. Covert: Here firms try to hide the result of their collusion, usually to avoid detection by
regulators when fixing prices
 3. Tacit :A rule based collusion where firms act together, called acting in concert , no
formal or informal agreement exists here.

FEATURES OF OLIGOPOLY:

1. Interdependence: Firms can not act independently of each other.

2. Strategy :Anticipation strategy is the key.
3. Barriers to entry: Costly or difficult for new entrants.
4. Collusive oligopolies: Firms prefer colluding rather than competing
5. Product customization: Can be identical or differentiated according to specific
industry

Question 2

answer for Part2 A here.

1)The business was producing 92 articles.

2)The total corresponding profit was 2500 EUROS.

3)Considering the fat that the firm is operating in a perfectly competitive market as here,
Marginal revenue curve is a horizontal straight line.

Marginal revenue= change in quantity/change in total revenue. We find that this is the same
at all levels .i.e 375 EUROS.

Profit maximizing for a perfectly competitive firm happens when it produces at quantity of
output P=MC
 For the firm to arrive at profit maximizing level of output it will occur when MC(Marginal
cost)=Marginal Revenue(MR), which would happen when the below mentioned scenario is
achieved:

No of journalist- 8

Articles per month – 92

Total profit – 2500 EUROS

answer for Part2 B here.

1) We have to fire 6 journalists

2) New total profit would be 1500 EUROS

3) We had to fire more journalists due to following

- A negative impact of having more than 4 journalists is observed on total profits
- The profit maximization condition is met at MC Value of 250 EUROS which is
achieved when no of journalists are 4.
- Any increase in no. of journalists from 4 would result in a state where Marginal
cost>Marginal Revenue which would be an undesirable state to operate in terms of
profits.

Question 3

answer for Part 3 A here.

India would experience a case of cyclical unemployment. This would happen as the aggregate
demand in the Indian economy will decrease due to an economic downturn ,because of which
any recession consumers are less likely to spend, this would create a scenario where smaller
number of people required to supply the demand.

AS a result of recession businesses wont have enough available jobs /requirement for the labor
available in the market. Due to this lag of losing their job and delay in finding a new job the
scenario of India would be that of cyclical unemployment

answer for Part B here.

Such a pandemic would create a supply led recession or supply shock followed by a demand
led recession or demand shock. The loss of economic output from labor staying away from
work would create supply shock or supply led recession and furthermore there would be less
consumption afterwards which would lead to demand led recession

It would be a case of twin supply demand led recession.

answer for Part C here.

Aggregate supply would fall as labor would stay away from work due to unemployment and
subsequently aggregate demand would fall in short run as the lockdown period is extended
and people spend less. The AD and AS equilibrium level of GDP would fall below the potential
level of GDP.

answer for Part D here.

A reduction in AD from AD0 to AD1 causes a leftward shift in aggregate demand curve. This
reduction would lower the GDP (Y1 TO Y0) and price levels (P0 TO P1)

Price levels would be higher

Which would lead to economic contractions making the demand fall below the economic
potential of GDP, and hence caussing a recession
 A recessionary gap would occur when aggregate demand curve would intersect the AS curve

Question 4

answer for Part4 A here.

The Indian government should adopt an expansionary fiscal policy in case of such a crisis.

Measures

-Direct spending and deferred revenue

-Measures to support businesses and increase credit provision to several sectors

-Create policies through budgeting tools tom provide people with more money.

-Increase spending and cutting down taxes so that there is more money in the economy

4a continued

-More money should be allocated to big infrastructure projects.

-Free food grains to people and direct cash transfers

-Quasi fiscal measures where prices are less than usual market rate.

answer for Part4 B here.

The reserve bank should apply dovish or expansionary monetary policy.

Measures:

- Enhanced liquidity in the market from monetary measures should keep borrowing
cost at check for central and state governments.
- Regulatory measure to promote credit flows to retail sector and MICRO , SMALL
AND MEDIUM ENTERPISES (MSME)
 - Easing financial constraint for states

-Ease the amount of money banks are required to maintain as reserves

- Lowering the repo and reverse repo rate so that cost of borrowing of banks would
decrease and more money would thereby be injected into the market.

-Targeting business to promote their growth.

Target more FDI / FII ,The more foreign inflows the more money would be injected into the
market.