IMT Covid19 PDF

Name Arpit S N
Question 1
Collusion in Oligopolies involves joint decision making by few players in the market to
influence output price of a product. Oligopoly arises when a small number of large firms have
most power over the sale in the industry. For Example – Commercial air travel. These firms
collide for reasons like maximizing profit, reducing uncertainty and cutting consumption cost.
Advantages:
Produces in oligopoly market, by collusion, can manipulate and increase prices and/or
reduces cost in the market. Like OPEC during pandemic, when prices fell into negatives,
implying that people would pay to get rid of the oil, the decision to reduce the supply helped
save cost.
Disadvantage:
Collusion leads to high prices for consumers leading to decline in consumer surplus.
New firms can be discouraged to enter the market.
Reasons for OPEC to cut the supply of oil:
• The demand of oil shrunk down due to the lockdown that lead to surplus of oil and
increased cost of storage. Traders were paying money to get rid of oil.
• Shortage of storage space forced OPEC to cut supply.
Desired outcome of the supply cut was to increase oil price which has fallen into negatives due
to record surplus due to worldwide lockdown.
Change in demand and Supply Curve before the decision: Due to the record fall in oil
demand, the demand curve would shift broadly to the left (D2) and supply would remain the
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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 as per the below graph.
X
S
Excess Supply
Price
D1
D2
Y
Quantity
Change in demand and Supply Curve after the decision: After the decision to cut the supply,
the oil price would slightly increase however, of course not equal to before the pandemic. The
supply curve will shift (S1) and the new equilibrium increased the price and slight rightward
shift in the demand curve (D1) towards the end of the year.
S1
X
S0
Price
D1
D0
Y
Quantity
OPEC operates in an Oligopoly market. Key features of such a market are:
• Only few large firms dominate the market

• The product supplied can be identical like commercial airline and differential like soft
drink industry
• Restricted entry into the industry due to the existence of big players in the market.
• Interdependence within the players in the market like change in price of Pepsi would
affect coke.
• Prevalent advertiser like advertisements during cricket world cup
Question 2
• Considering the business was operating on maximum profit, it was producing 92

articles as this is where marginal cost is equal to marginal Revenue.
• The total profit was EUR 2,500 i.e. Total Revenue minus the Total Cost (34,500-
32,000)
• To reach at profit maximizing output, following steps were followed
o Identify Fixed and Variable cost and add both to arrive at Total Cost for each
level of output
o Calculate Marginal Cost at each level by dividing Change in Total Cost by
Change in Output
o Identify Revenue at each level by multiplying price of each article and number
of articles.
o Calculate Marginal Revenue at each level by diving Change in Revenue by
Change in Output
o Finally, subtract Marginal Revenue and Marginal Cost to arrive at change in
Price.
When the Change in Price, at a certain output level, reaches Zero i.e. MC is equal to MR, it
will be the profit maximizing output.
• The business would have to let go 4 employees as it if following profit maximization.

The new profit maximizing level has reduced to 54 articles per month as opposed to 92
articles previously. Thus, this leads to 4 extra employees as per the current situation.
• The new Total Profit is EUR 1,500 i.e. 13,500 minus 12,000
• Reasons for the layoff of journalists are:
o The profit reduced substantially due to the decrease in price of per article from
EUR 375 to EUR 250.
o The decrease in profit lead to smaller Total profit i.e. EUR 1,500 than EUR
2,500 previously.
o Since company’s main concern is profit maximization, the negative change in
profit would lead to extra cost and no profit. Keeping extra employees was not
in line with company’s favor.
o The difference between Marginal cost and Marginal revenue 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 ( 8 minus
4 journalists)
Question 3
Cyclical Unemployment is the type of unemployment country like India would experience due
to the pandemic.
As per The Economic Survey of 2018-19, 85% of Indian population still works in informal
sectors like construction labors, car repair, grocery stores, and domestic workers. This type of
employment can be considered quasi-legal in that the work is considered "legitimate" But
because it is unregulated and not covered with any contract, such a pandemic can leave these
workers out of job. When Prime Minister had imposed total lockdown on 24th March, 2020,
the small shop owners and small businesses suffered a shocking fall in their income leading to
letting go of most of the employees. A small short term recession lead to fall of aggregate
demands. Consumer spending became limited due to the uncertainty. This increased
unemployment in daily wage workers, domestic helps, travel agencies until the later part of the
year when lockdown was slowly lifted and businesses slightly regained its market. Considering
this pandemic is short run, the unemployment faced due to this pandemic was cyclical.
Demand-led recession is caused by such a pandemic.
The Aggregate Demand in an economy includes Household Consumption, investments,

Government Spending and difference between Imports and Exports. The pandemic created a
situation of unrest worldwide due to virus being unknown and deadly. The lockdown, as
necessary and helpful as it was, disrupted income for 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. Fall in Aggregate Demand reduces the GDP too. Investors and
consumers now wanted to hold onto the money than spend shortening flow of money in the
economy.
Thus, this pandemic was a demand-led recession.
In India, due to the above phenomenon, aggregate demand and aggregate supply shifted
leftwards.
Aggregate Demand shift towards left – Due to the fall of consumer spending and willingness
to invest, the Aggregate demand fell and shifted towards left. When the demand shifts towards
left and supply remains the same, the price of goods fall.
Aggregate Supply shift towards left – When the lockdown was imposed, the demand took a
sharp fall but supply remained same for some time which created surplus in the market
leading to leftward shift in the Aggregate supply curve.
In this situation, Aggregate demand curve will shift towards left due to the fall in demand.
Aggregate supply curve will first shift towards left due to the surplus in the market but later in
the year will shift towards right adjusting itself with the demand and investment.
Question 4
The type of macroeconomics steps Indian government should take after the crisis created by
pandemic:
Expansionary Fiscal Policies:
o 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 provide 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.
o Taxation – lowering tax directly helps consumers with more money in hand for
expenditure. This is a famous method applied by many democratic countries in
the time of crises and recession.
The type of macroeconomics steps reserve Bank of India should take after the crisis created by
pandemic:
Monetary Policies:
o Influx money in the economy by purchasing government bonds so that

population has more money in hand to influence then to spend and create
demand.
o Reduce Interest Rate – Government should reduce interest rate on borrowings
to allow consumers to take loan and spend the same again increasing demand
and flow of money in the market. It should also relive farmers and daily wage
workers of some part of their loan, allowing delay in loan repayments by the
small businesses and unemployed population.
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Name Arpit S N

New firms can be discouraged to enter the market.

Reasons for OPEC to cut the supply of oil:

OPEC operates in an Oligopoly market. Key features of such a market are:

• Only few large firms dominate the market

• Considering the business was operating on maximum profit, it was producing 92

• The business would have to let go 4 employees as it if following profit maximization.

Demand-led recession is caused by such a pandemic.

The Aggregate Demand in an economy includes Household Consumption, investments,

Thus, this pandemic was a demand-led recession.

Expansionary Fiscal Policies:

o Influx money in the economy by purchasing government bonds so that

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