Name Badri Narayan Mishra

Question 1

Question 1A: Name and describe the phenomenon which involves such joint decision-making. What
are its advantages and disadvantages?

Answer:

The phenomenon which involves such joint decision-making is termed as a Collusion.

Collusion in Oligopolies is primarily a secretive agreement or cooperation between two producers

which aims at a disruption in market stability to mould the supply or price of a product. Practices of
collusion also involve compromised advertisement, and giving out confidential information.

Advantages of Collusion could be the following:

• Collusion between firms can be beneficial for consumers. For example, tacit collusion includes
firms who monitor what other firms sell to ensure that they are matching the cheapest price
in a geographical area and prevents the underselling of a product and controls monopolistic
producers.
• In case of OPEC, during pandemic, prices fell into negatives. This implied that people would
pay to discard the surplus oil due to lack of bandwidth to store such large volumes of oil. The
decision to reduce the supply helped save cost and ensured Steady supply.
• The prominent producers can achieve economies of scale resulting in lower product prices in
the long run.
• It might lead to more investment in research and development thereby enhancing industry
standards.

Disadvantages of Collusion could be the following:

• The demand and supply are determined by the colluding parties as opposed to normal market
forces. Thus, it can reduce the number of choices for consumers.
• Generally, price-fixing or Cartel-like behaviour eliminates competitors and creates
prohibitive barriers for new market entrants. As competitive pressures diminish, the
dominant producers are less likely to strive to be more innovative and productive This results
in less dynamic efficiency.
• This exploits the consumers since they might have to pay a higher price. This also hampers
consumer surplus.
• There is a potential loss of economic welfare.
Question 1B: What made OPEC decide to cut the supply of oil? What was the desired outcome of the
decision? What was the change in the supply and demand curves of oil and the subsequent market
equilibria? Analyze the changes both before and after the decision to reduce supply.

Why did OPEC reduce the supply of oil?

The demand of reduced heavily due to the lockdown. This resulted in surplus of oil and increased
cost of storage and prices fell into negatives. This implied that people would pay to discard the
surplus oil due to lack of bandwidth to store such large volumes of oil.

Thus, the shortage of storage space forced OPEC to cut supply. The decision to reduce the supply
was intended to save cost and to ensure increase in oil price.

Change in demand and Supply Curve before the decision:

Due to the heavy fall in oil demand,

• The demand curve would have shifted to the left, (D2) and supply would remain unchanged.
• This would lead to fall in the price, as equilibrium point would go downwards.
• The lack of demand would cause surplus in the market.
Change in demand and Supply Curve after the decision:

• The oil price would slightly increase, still it would not reach the pre-pandemic level.
• Equilibrium point will shift upwards.
• The supply curve would shift to left (S1).
• There will be slight rightward shift in the demand curve (D1) in long run.

Question 1C: What market structure does the OPEC operate in? What are the key features of such a
market structure?

OPEC operates in an Oligopoly market.

Key features of such a market are:

• Limited number of large producers dominate the market with large market shares
• The product can be identical or like commercial airline/telecom and differential like soft drink
industry.
• High barriers to enter the market structure due to the pre-existent large producers in the
market.
• Interdependence is observed within the producers in the market. (Change in price of Pepsi
would affect Coca-Cola as substitution effect comes into play).
• Each firm has a say in the market.
Question 2

Question 2A: Assume that the business was operating at the profit maximizing level of output
before Covid-19. Each article brought in an ad revenue of €375.

How many articles was the business producing?

The business should be producing 92 articles. (@ MC=MR)

What was the total profit?

Total profit is the difference between total output revenue and total input cost.

In this case, Profit = TR – TC = €34500- €32000 = €2500

Explain conceptually how you arrived at the profit maximizing level of output. You don't need to
show exact calculations.

To reach at profit maximizing level of output,

• I noted the fixed and Variable cost and added both for each case to calculate total Cost for
each level of output.
• I found marginal cost at each level by dividing change in total cost by change in output.
• Then I calculated revenue at each level by multiplying price of each article and number of
articles.
• I calculated marginal revenue at each level by diving change in revenue by change in output.
• Finally, subtract marginal cost from marginal revenue to calculate the change in price.
(MR - MC)
• When the change in price, at a certain output level, reaches zero @ MC = MR, that will be
our profit maximizing level of output.

Question 2B: On 9th March 2020, Italy went into lockdown. As a result, you had to shut down your
office and adopt a ‘work from home’ policy. This eliminated your fixed costs of €8000. At the same
time, your ad revenue per article reduced to €250. This was because all companies suddenly
reduced their advertising spending.

How many journalists would you have to fire?

• The new profit maximizing level of output would change to 54 articles per month. Thus, it
implies I have 4 extra employees as per the current situation. (I need 4 corresponding to
current output 54, but I have 8 corresponding to previous output 92).
 • Thus, I would have to lay off 4 employees according to profit maximization.

What is your new total profit?

The new total revenue is 13,500(54 times 250).

Total cost is 12,000(4 times 3000).

New total profit TR – TC = €13500 – €12000 = €1500

Why did you fire the journalists?

• The profit reduced significantly due to the decrease in price of each article from € 375 to
€250. Total profit also decreased € 1500 (from €2500 previously)
• I would prioritize profit maximization.
• The reduction in profit would result in extra cost. Keeping 8 employees would not be
favorable anymore.
• The difference between Marginal cost and Marginal revenue became zero at 4 journalists
and 54 (so, I need 4 corresponding to current profit maximizing output of 54, but I have 8
corresponding to previous output 92). As per profit maximization, 4 journalists had to be
fired (8 minus 4 journalists).

Question 3

Question 3A: What type of unemployment would a country like India experience from such a
pandemic.

• India has experienced Cyclical Unemployment due to the pandemic. It is the type
unemployment caused due to the business cycle, where the number of unemployed
individuals rises during recessions and declines with the growth of the economy.
• According to the latest data, as many as 27.69 crore informal sector workers are registered on
the e-shram portal. This includes sectors like construction labours, car repair, grocery stores,
and domestic workers.
• This type of employment can be considered quasi-legal in that the work is considered
"legitimate”, but it is unregulated and not covered with any contract, such a pandemic can
throw these workers out of job.
• After complete lockdown was imposed, the small shop owners and small businesses suffered
a shocking fall in their income , so they had to let go of most of the employees.
 • A short term recession caused a fall of aggregate demands. Consumer expenditure became
limited due to the uncertainty.
• This increased unemployment in informal sectors, travel agencies.
• When lockdown was gradually reduced, businesses slightly regained their market.
• Considering this pandemic is a short period of time or short-run, the unemployment can
be regarded as cyclical.

Question 3B: What type of recession would be caused by such a pandemic? Provide an
explanation.

• Demand-led recession is caused by such a pandemic.

• It started as a supply led recession, but gradually turned into a demand led recession.
• 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 and uncertainty. The lockdown affected the
income for majority of the population, caused a cyclical unemployment.
• Thus spending limit also reduced which resulted in fall in aggregate demand.
• The fall in aggregate demand would reduce the GDP as well. Investors and consumers
now wanted to save money in this uncertain time.
• Thus there was a downfall in flow of money in the economy. Thus, this pandemic was a
demand-led recession.

Question 3C: What would happen to the aggregate demand and aggregate supply in India
because of the above two phenomena?

Aggregate demand and aggregate supply would shift to the left.

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.
 Question 3D: How will the AD/AS curves behave in this situation? Please elaborate your
answer.

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

Question 4A: What type of macroeconomic policy should the Indian government adopt after such a
crisis?

The Indian government should adopt the following fiscal policies.

Expansionary Fiscal Policies:

 • Government Expenditure – In India, more than half of the population was unemployed
after the lockdown. Thus the government 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 facilities to the
poor.
• Taxation – Lowering tax directly helps consumers They would have more fluid money for
expenditure. This is a famous method applied by many democratic countries in the time
of crises and recession.
The government should take steps to boost cross border trade, infrastructure, and run large
budget deficits to tackle economic turndowns.
Specific sectors, like the auto industry should be provided GST relief. After covid, the
demand shows signs of saturation, thus GST rate cut (done for a temporary period) is likely to
boost the demand for vehicles.

Question 4B: What type of macroeconomic policy should the Reserve Bank of India adopt
after such a crisis?

• Monetary Policies:
• 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.
• Reduction in 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.
• RBI should take a cue from central banks across the world who are contributing by easing
liquidity
• Relaxation in NPA terms and Repo rate cut should also be considered after such a
devastating economic turndown.