Name PRABHUDATTA SWAIN

Question 1

Question 1A. Joint decision-making such a group is termed as a Collusion. Collusion in

Oligopolies involves joint decision making by few players in the market to influence output
price of a product.

Advantages of this policy:

1. Price Stability: It can help to stabilize the price of oil in the global market.
2. Increased Revenue: The member countries earn more revenue from their oil exports.
3. Strategic Influence: It can use its position to influence the policies of other countries,
and even shape global politics.

Disadvantages of this policy:

1. Reduced Competition: By controlling the supply of oil, this can limit the entry of new
players.
2. Price Inflation: It can lead to price inflation. This can harm consumers and lead to
economic instability in some cases.
3. Dependence on Oil: It can make their economies vulnerable to fluctuations in the
global oil market.
4. Conflict of Interests: This can lead to instability and even the dissolution of the oil
market.

Question 1B. The OPEC decided to cut the supply of oil in May 2020 due to a combination of
factors that led to a steep drop in oil prices. The COVID-19 pandemic led to a significant
decrease in global demand for oil as travel and economic activity slowed down. At the same
time, a price war between Saudi Arabia and Russia in March 2020 led to a sharp increase in
the supply of oil, further pushing down prices. The decision to cut the supply of oil was aimed
at balancing the supply and demand of oil in the market, which had become severely
imbalanced due to the COVID-19 pandemic and the price war between Saudi Arabia and
Russia. OPEC's objective was to prevent a further drop in oil prices, which would have been
harmful to its member countries and the global economy as a whole.

The desired outcome of OPEC's decision to cut the supply of oil was to stabilize the price of
oil, prevent a further drop in oil prices, and create a more favorable economic environment for
OPEC member countries.

The reduction in supply caused a leftward shift in the supply curve of oil, as there was now
less oil available in the market. At the same time, the COVID-19 pandemic had led to a
decrease in demand for oil, causing a leftward shift in the demand curve. The net effect of
these shifts was a decrease in the quantity of oil demanded and supplied.

As a result of the leftward shifts in the supply and demand curves, the equilibrium price of oil
increased, while the equilibrium quantity of oil decreased. The new market equilibrium was at
a higher price point and a lower quantity of oil traded.

Question 1C. The OPEC Operates in an Oligopoly market structure.

The key features of an oligopoly market structure are:

1. Few large firms: The market is dominated by a small number of large firms, each of
which has a significant market share.
2. Interdependence: Each firm's actions and decisions have a significant impact on the
market and on its competitors. As a result, there is a high degree of interdependence
among firms.
3. Barriers to entry: Barriers to entry are high, which makes it difficult for new firms to
enter the market and compete with existing firms.
4. Product differentiation: Firms differentiate their products from those of their
competitors through advertising, branding, and other marketing strategies.
 5. Non-price competition: Because the firms in an oligopoly have some degree of control
over the price of their products, they tend to focus on non-price competition, such as
advertising and product differentiation.
6. Price rigidity: Firms in an oligopoly are reluctant to change their prices because they
are concerned about the reaction of their competitors.
7. Collusion: Because of the high degree of interdependence among firms, they may
collude to fix prices or limit output in order to increase profits.

Question 2

Question 2A. The news article was producing 92 articles.

The total profit is 2500.

To reach at profit maximizing output, following steps were followed

1. 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.
2. Identify Revenue at each level by multiplying price of each article and number o of
articles.
3. Calculate Marginal Revenue at each level by diving Change in Revenue by Change in
Output.
4. 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.

Question 2B. The business would have to let go of 4 employees as it is following maximizing
profit.

The new total profit is 1500.

Reasons for the layoff of journalists are:

The profit reduced substantially due to the decrease in price of per article from EUR 375 to
EUR 250. The decrease in profit lead to smaller Total profit i.e. EUR 1,500 than EUR 2,500
previously.

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
favors.

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

Question 3A. 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.
Question 3B. 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.

Question 3c. 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.

Question 3d. 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. The type of macroeconomics steps Indian government 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 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.
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.

Question 4b. a In a country like India, where pandemics can severely impact the economy, the
Reserve Bank of India (RBI) can adopt several macroeconomic policies to mitigate the effects
of such a crisis. Some of the key policy measures that the RBI can undertake are:

1. Monetary Policy: The RBI can adopt an accommodative monetary policy to increase
the money supply in the economy. This can be achieved by reducing the policy interest
rates, such as the repo rate, which can reduce the cost of borrowing for businesses and
households. Lower interest rates can stimulate demand for credit and encourage
spending and investment, which can help to revive economic activity.
2. Fiscal Policy: The government can adopt expansionary fiscal policies to increase
spending and stimulate demand in the economy. This can be achieved by increasing
government spending on infrastructure, healthcare, and other key sectors, as well as by
reducing taxes to provide relief to businesses and households.
3. Liquidity Support: The RBI can provide liquidity support to banks and financial
institutions to ensure that credit flows to businesses and households. This can be
achieved by providing loans and other forms of credit to banks, or by reducing the cash
reserve ratio (CRR) and statutory liquidity ratio (SLR) to increase the funds available
for lending.
4. Regulatory Support: The RBI can provide regulatory support to banks and financial
institutions to ensure the stability of the financial system. This can be achieved by
relaxing regulatory norms or providing other forms of support to help banks manage
their balance sheets and maintain their liquidity.
5. Exchange Rate Management: The RBI can manage the exchange rate of the Indian
rupee to maintain its stability and prevent large fluctuations. This can be achieved by
using various tools, such as intervening in the foreign exchange market or adjusting
policy interest rates.