Name Neha Kumari Gupta

Question 1

Write your answer for Part A here.

The phenomenon which involves such joint decision-making is called Collusion. Collusion
takes place in oligopoly market where there are firms that control the output and prices of the
products.

Advantages:

i) Low level of competition

ii) Price Stability within the market
iii) Product can be highly differentiated

Disadvantages:

i) High barriers to entry

ii) Interdependence
iii) Limited customer choice

Write your answer for Part B here.

OPEC decided to cut the supply of oil due to lockdowns imposed by various governments and
factory closures. The world went into lockdown which saw a sharp fall in demand for fossil
fuels in the current supply as vehicles were not running, there was no demand for gas or diesel.
OPEC decided to cut down supply of oil so that they can retain the levels of profits which
they previously had or reduce losses to a certain context.
Change in demand and supply curve before the decision: There was leftward shift in
demand curve and supply would remain the same since at this time the decision to cut supply
was not made This would lead to fall in the price and create surplus in the market.

Change in demand and supply curve after the decision: After the decision to cut the
supply, the oil prices would slightly increase. The supply curve will shift leftwards, and the
new equilibrium increased the prices and slight rightward shift in the demand curve towards
the end of the year.

Write your answer for Part C here.

OPEC operates in an oligopoly market structure. An oligopoly is a market whereby two or

more firms have market control.

Features:

i) The exact same good is produced by a few sellers.

ii) There are two or three major sellers.
iii) Sellers have a high bargaining power
iv) Entry into the industry is restricted because of the existence of big players in the
market.

Question 2

Write your answer for Part A here.

• 92 Articles as this is where marginal cost is equal to marginal revenue.

• The total profit was EUR 2,500. i.e., Total Revenue – Total Cost (34500 - 32000)
 • To reach at profit maximizing output, following steps were followed:
a) Identify fixed and variable cost and add both to arrive at total cost for each level of
output. Calculate marginal cost at each level by dividing change in total cost by
change in output
b) Identify revenue at each level by multiplying price of each article and number of
articles.
c) Calculate MR at each level by diving change in Revenue by change in output.
d) At last, Subtract MR and MC to arrive at change in price.

When the change in price at a certain output level reaches 0. That is, MC is equal to MR, it
will be the profit maximizing output.

Write your answer for Part B here.

• As the profit maximizing level is being considered, the business would have to fire 4
journalists as they enjoy maximum profits by producing 54 articles with 4 journalists.

• The new total profit is EUR 1,500.

• Reasons to fire journalists:

1) The profit reduces substantially due to decrease in price of per article from EUR
375 to EUR 275. The decrease in profit lead to smaller total profit.
2) Since the company’s main concern is profit maximization, the negative change in
profit would lead to extra cost and no profit.
3) The difference between MC and MR became zero at 4 journalists and 54 articles as
opposed to 8 journalists and 92 articles previously. To follow profit maximization 4
journalists had to be fired.

Question 3
Write your answer for Part A here.

The type of unemployment that a country like India would experience from such a pandemic is
Cyclical unemployment. As there was a fall in aggregate demand which resulted in reduction
of profit of the firms. This led to lay off of the workers due to which there was an increase in
unemployment rate. However, this type to unemployment is short term.

Write your answer for Part B here.

Demand led recession is caused by such a pandemic.

The aggregate demand in an economy includes, Household consumption, investments, Govt.

spendings and difference between imports and exports. The pandemic created a situation of
unrest worldwide due to virus being unknown and deadly. The lockdown disrupted income of
majority of the population. Due to the lack of income and unemployment, the demand and
spending limit also reduced leading to fall in aggregate demand. The mass unemployment and
widespread bankruptcy converted the recession into a demand led recession.

Write your answer for Part C here.

In India due to the above phenomena, the aggregate demand and aggregate supply shifted
leftwards.

Aggregate demand shift towards left: Due to fall of consumer spending and willingness to
invest, the aggregate demand shifted leftwards. The demand of goods falls as the demand
curve shifts left and supply curve remains same.

Aggregate supply shift towards left: When the lockdown was imposed, the demand took a
sharp fall but supply remained same for sometime which created surplus in the market leading
to leftward shift in the aggregate supply curve.

Write your answer for Part D here.

 The pandemic was both a supply shock recession and demand led recession.

The aggregate supply had fallen caused by disruption in supply chain, reduction in investments
etc. resulting the AS curve to shift to the left.

The aggregate demand had fallen due to unemployment reduction in purchasing power and
bankruptcy resulting in leftward shift of the AD curve

Question 4

Write your answer for Part A here.

The type of macroeconomic steps Indian govt. should take after the crisis created by
pandemic:

Expansionary fiscal policies-

• Government Expenditure – In a country like India, where more than half of the
population was unemployed after the lockdown, it should introduce relief programs
like providing unemployment compensation to daily wage workers, farmers, free travel
for migrants with no job, control basic medical charges and provide minimum
healthcare facility to impoverished.

• Taxation – Lowering tax directly helps consumer with more money in hand for
expenditure. This is famous method applied by many democratic countries in the time
of crises and recession.

Write your answer for Part B here.

The RBI should adopt an expansionary monetary policy to infuse cash/liquidity into the
market. RBI can regulate the flow of cash in the economy through following tools:
1) Open Market Operation – By purchasing the government bonds from open market
and infusing cash into the economy.
2) Repo rate – It is the interest rate at which banks can borrow from RBI. During
recession RBI will lower its repo rate making it easier for banks to borrow more from
RBI thereby making loans cheaper for public.
3) Reverse repo rate – Reverse repo rate is the interest rate at which RBI will pay to the
banks that have deposited its funds with RBI. During recession, RBI will reduce the
reverse repo rate in order to encourage banks to deposit less with RBI thereby
increasing liquidity and infusing cash into the economy.
4) Cash reserve ratio – It is a ratio fixed by RBI at which al banks must maintain a
minimum cash reserve. RBI reduces the cash reserve ratio during recessions, freeing up
surplus cash in order to infuse funds into the economy.