Name Shivam Hatole

Question 1

Write your answer for Part A here.

The Phenomenon which involves such joint decision making is known as Collusion. Collusion
takes place in an Oligopoly market where there are few firms that control the output and
prices of a products. OPEC is one such organization where the member nations are
in collusion.

The following are its advantages:

1. Firms/Organizations collude with the intention of maximizing profit and reducing

competitiveness of the market.

2. During uncertain time, like recession, firms/organizations have the power to control supply
which in turn helps in keeping the price stable.

3. Since firms/organizations united as per this phenomenon, competitive advertising is

avoided, thus helping the firms to solely focus on production.

The following are its disadvantages:

1. Collusion mainly implies high prices for consumers, thus leading to a decline in consumer
surplus.

2. Colluding firms act as a unit and restrict entry into the market, eliminating fair competition.

Write your answer for Part B here.

Reason for decision to cut supply

Due to the Pandemic the world went into lockdown which saw a sharp fall in demand for fossil
fuels with the current supply. OPEC decided to cut down supply to stabilize the fall in prices.

Analysis of OPECs decision

Before

There was leftward shift in the demand curve which was caused due lockdown
resulting in less consumption of crude

After

The decision to cut supply resulted in leftward shift of the supply curve from. However OPEC
couldn’t fully achieve the desired outcome as it was faced with an in elastic demand. This was
because the consumer countries were faced with surplus stock of crude and couldn’t take in
more supply. Consequently it did not add much to bring prices to pre-COVID levels as
predicted by OPEC

Write your answer for Part C here.

OPEC operates in an Oligopoly market structure.

The following are its features

1. Few firms that are interdependent or in collusion

2. The members have control over the price/quantity

3. There are high barriers to entry for new firms

Question 2

Write your answer for Part A here.

As the Italian news website considers operating at the profit maximising level of output. It
enjoys maximum profit while producing 92 articles with 8 journalists.

The total profit was €2,500

In order to find the profit maximising level we must calculate the equilibrium level between
Marginal Costs and Marginal Revenue i.e. at this level of output the marginal
cost is equal to the marginal revenue

Write your answer for Part B here.

As the profit maximising level is being considered I would have to fire 4 journalists as I enjoy
maximum profits by producing 54 articles with 4 journalists

The new total profit is €1500

The website considers profit maximisation. During the pre-COVID period I had achieved
maximum profit by producing 92 articles with 8 journalists. Due COVID restrictions my costs
and revenue had reduced due to which I achieve equilibrium (marginal cost = marginal
revenue) and maximum profit by producing 54 articles with4 journalists. Hence, I will fire 4
additional journalists

Question 3

Write your answer for Part A here.

India would face cyclical unemployment Due to COVID there was a fall in the
aggregate demand which resulted in reduction of profit of a firm. This led to lay off workers
increasing the unemployment rate.

However this type of unemployment is short term i.e. as the economy recovers the aggregate
demand would go up due to which firms would start employing more people to meet the
aggregate demand.
Write your answer for Part B here.

Due to the restrictions and measure taken by governments to control the spread of pandemic
the recession started as a supply shock recession which gradually became a
demand led recession.

The restrictions such as lockdowns and social distancing imposed by governments to control
the pandemic caused major disruption in the supply chains which led to a fall in aggregate
supply leading to supply shock recession.

As the profits of firms were reduced, firms had to lay off of workers. This caused a reduction of
purchasing power which led to a sharp 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.

The aggregate demand would fall due to mass unemployment reduction in purchasing power
and bankruptcy caused by the pandemic.

The aggregate supply would also have a fall as there is a reduction in investment, disruption
in supply chain

Write your answer for Part D here.

The pandemic was both a supply shock recession and a 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 government should adopt expansionary fiscal policy. Expansionary fiscal policy is
implemented during times of recession or slow economic activity in order to
stimulate the economy and increase aggregate demand.

The government can use the following tools to implement the policy:

1. Taxation

Government can reduce the tax burden during pandemic to ease citizens by adding to
their purchasing power

2. Government spending

The government can increase its spending by providing stimulus packages or transfer
payments to citizens, providing subsidies to support economic activity there by increasing the
aggregate demand in the economy. One example of the expansionary fiscal policy by the India
government Protection of workers in the informal sector through Mahatma Gandhi National
Rural Employment and Jan Dhan accounts. These systems operate as automatic stabilizers in
a way that the unemployed persons can apply for jobs when they need them

Write your answer for Part B here.

The Reserve Bank of India should adopt an expansionary monetary policy to in fuse
cash/liquidity into the market. RBI can regulate the flow of cash in the economy through the
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 recessions, RBI will reduce the reverse repo
rate in order to encourage banks to deposit less with RBI thereby increasing liquidity and
infusing cash into economy

4. Cash reserve ratio – It is a ratio fixed by RBI at which all 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