Project IMT Covid 19

Question 1

A) The phenomenon which involves joint decision making is collusion in Oligopolies and
thus a cartel is formed which in our case is OPEC. By definition, when there are few
players in market, firms are able to come together to influence output and price of a
product, this is known as collusion. A cartel is formed by a group of firms who have
colluded.
Advantages: Suppliers: -
1. Joint Profits- Firms in an Oligopoly are independent, which give rise to the
potential of joint profit maximization.
2. Reduce uncertainty- Strategic decisions regarding output and prices are made
which in turn reduces uncertainty.
3. Lowers competition costs- Spending on marketing and advertising as products are
not differentiated.
4. Extra profits can be used for research and innovation of the product.

Disadvantages: Suppliers: -

1. High prices- High price may lead to decline in consumers.

2. Cheating Cartel members- There are scenarios where collusion became ineffective
due to high profits and lazy mentality and ultimately leading to less Innovation and
cheating. This is where Game theory of cheating firm comes into play.

Advantages: Consumers: -

1. Price stability to the consumers- As collusion have the fear of losing consumers, so
they try to keep a price stability in the market.
2. More refined and Innovative form of products.

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 Disadvantages: Consumers: -

1. The form of collusion can trigger higher prices for the products.
2. There also can be decision making bias and irrational behavior as they have removed
the threat of competition from the market and then try to act as monopoly.
3. There may be scenarios of deliberate entry barriers in the market which will not allow
new firm to enter the market.

B) As per the report “COVID-19-The Global Shutdown”, soon after the supply shock the
world encountered demand shock, which in turn reduced the requirement of Natural
resources(Oil) and thus oil prices reduced to its lowest levels since 2003. Then by May,
the oil benchmark fell into negatives implying that people will pay to get rid of surplus
oil and thus OPEC decides to cut the production to 9.7 million barrels a day.

There can be many desired outcomes of the decision. Firstly, to revive the oil market as
it was collapsing due to the excess oil in the market and continuous reduction in prices.
Secondly, reduction in production means fall in supply and when the excess will be
consumed then there will be increase in demand and hence increase in prices. Thirdly,
reduction of production will also reduce their marginal cost and reduction in supply
also stop the price from falling anymore.

The situation before the OPEC decided to cut the production was not a very suitable
position for oil. The demand was decreasing and the prices were its lowest since 2003.
Thus, the demand curve was shifting leftward however as the OPEC countries was not
able to reach consensus with other oil producing countries, so kept on producing and so
the supply curve moved towards right with slight different and thus the equilibrium
price point changes and forms at a lower point. However, when the OPEC decides to
cut the production, then imagined the situation where less supply can lead to excess oil
consumption. This triggered a demand and oil prices went up. Thus, in this scenario,
the supply curve shifts left and demand curve shifts right as the OPEC hope to gain

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 more demand and prices went up. Hence, in this scenario too the equilibrium price
forms at a higher point than before.

C) The market structure of OPEC operates under Oligopoly segment.

Key features: -
1. Few large firms- i) Duopoly where two firms dominate the market
ii) Understand its optimal price and output.
iii) Actions taken by the firm can directly impact the firm’s profits.
2. Products can be homogenous or heterogeneous depending on the firm’s operation
place.
3. Entry into the industry is restricted because of existence of big players in the market.

Question 2

1. The business was producing 92 articles by having 8 journalists.

2. The total profit was 2500.
3. I have used excel sheet to calculate the variable cost, total cost, marginal cost and
marginal revenue. We know that profit maximization point is when marginal revenue
is equal to marginal cost, So I have calculated marginal cost with formula change in
total cost/change in output. The total cost was calculated VC+FC, so for competitive
firm is a price taker and the revenue from each article is $375 which is consistent for
marginal revenue i.e. for every one sold unit brings revenue of $375. Now at 92 article,
MR=MC and by using the formula Total Revenue-Total cost, value of profit equals to
2500.

1. Assuming that the idea is to only care about maximizing profits, 4 journalists need to
be fired to maintain profit maximization where MR=MC.
2. The new total profit is 1500.
3. As the idea was to maintain profit maximization, to obtain that we need to obtain such
a situation where Marginal Cost is equal to Marginal Revenue. To reduce cost, laying

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 off Journalists was one of the way to reduce costs, so 4 Journalists were fired and so
the rest of the agency can survive.

Question 3

A) India is experiencing Cyclical unemployment because of Covid-19 situation. Cyclical

unemployment takes place when the demand in the economy begins to decrease. In
such cases, the producers reduce their supplies and take off the employees. Thus it
creates an aggregate demand of market which further reduces the aggregate supply.
This phenomenon will further push the producers to take less employees. As the
aggregate demand of the firms or the producers shift let, they lay off employees as they
do not require them.

B) India is prominently an import based country and during pandemic faced shortage of
supply led recession. However, India is facing its worst recession as per Economic
times report from crisil. The report says India is facing Demand led recession and this
scenario is happening all around the globe. In this scenario, the aggregate demand
contracts and shifts to left as the households starts saving more which causes leakages
in the economy. General population stops purchasing and thus reduces the flow of
capital into the economy which indeed makes the suppliers to reduce production so as
to get rid of surplus products. This ripple effect ultimately leads to lay off employees
by the companies. The cycle continues and fill finally lead to Cyclical unemployment.
The general public is wary of future events due to pandemic and will not spend even
with attractive discounts thus this dries up the capital flow and leakages in the
economy continues.

C) In case of above phenomenon, the aggregate demand will decrease due to

unemployment and recession. People will not tend to invest or spend rather than save

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 money and thus create less aggregate demand which impact the aggregate supply as
well. Since there is low demand the producers will decrease the aggregate supply.

D) The Aggregate demand will shift to left because of recession and unemployment,
which ultimately lead to low demand and spending from households and Labors. The
Aggregate supply will also fall and shift left because the producers will reduce supply
to get excess stock out.

Question 4

A) Indian government should adopt Fiscal policy and that too Expansionary Fiscal policy.
The fiscal policy is the spending, taxation and borrowing that the government uses to
tide over the economy through fluctuations in the business cycle. Government should
implement two types of fiscal policies namely Expansionary policy which is used
during recessions and Contractionary policy during strong economic growth.

Objectives of fiscal policy: -

1. Reducing unemployment and stabilization of the prices.
2. Stabilize the growth rate of the economy.
3. Maintain equilibrium in balance payments and promote economic development.

During the pandemic situation, Indian government have adopted Expansionary fiscal
policy and announced stimulus package of 20lakh crores undermining with Reserve
bank of India monetary policies.

Highlights of fiscal policy:

i) Food related: Around two thirds of population will be covered under the
Pradhan Mantri Garib kalyan Anna Yojana.

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 ii) Direct benefit transfer: Farmers currently receive INR 6000 every month
through the PM-KISAN scheme in three equal instalments. About 86.9 million
farmers are expected to benefit from this immediately.
iii) MNREGA workers: wage increased from INR 182 to INR 202. Such increase
will benefit 50 million families. This wage increase will amount to an
additional income of INR2,000 per worker.
iv) Organized sector: Employees provident fund organization(EPFO) has
announced employees who contribute to EPF can withdraw up to 75 percent of
the account balance.

B) Reserve bank of India(RBI) adopts Monetary policy after the country faces such crisis.
The purpose of monetary policy is to influence the investment, savings and spending
decisions of consumers and businesses in the economy. These can be done in two
ways:
a) Regulating the money supply where the central bank buys the government bonds to
increase money supply in the economy.
b) Regulating interest rates- So it can induce more borrowing by cutting interest rates
if it deems so.
c) Central banks with their monetary policy need to strike a fine balance between low
inflation rates and stable economic growth.

Objectives specific for India: -

1. High employment- Tends to reduce idle resource which in turn boost the GDP of
the country.
2. Price stability- Keeps inflation in check.
3. Interest rate stability- It is desirable because fluctuations in interest rates can create
uncertainty in the economy and make it more difficult to plan for the future.
4. Stability of financial markets- The monetary policies focuses to create a stable
financial market to bolster the economy.

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 5. Stability in Foreign exchange market- It is one of the most important job of central
bank and its monetary policies to create a fine balance between the actual and
predicted cost of rupee. If rupee appreciates it becomes more expensive in
comparison to other developing markets and if depreciates, inflation increases as
imports become expensive.
6. Economic growth.

The RBI is supposed to take loose monetary policy or rather expansionary

monetary policy. As per the government stimulus package, RBI has taken loose
monetary policy by cutting down repo rates. Some of the measures taken are
mentioned below:
a) Liquidity measures- Reduction of policy repo rate of 75 basis points (from
5.15% to 4.40%)
b) CRR of all banks to be reduced by 100 basis points to 3% beginning March 28,
for one year. This will release liquidity of INR 1,37,000 crore across the
banking system.
c) MSF raised from 2% of SLR to 3% with immediate effect, applicable up to
June 2020.
d) Liquidity coverage ratio for banks reduced from 100% to 80%.
e) These liquidity measures will inject capital of INR4.74 lakh crores in to the
economic system.

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