Name Pulsar Gupta

Question 1

Part A.

The phenomenon in which few players in the market come together to make joint decision to
influence the market and price is called as Collusion. A group of firms/companies who have
colluded are called as Cartel. Collusion is a way for firms to make higher profits at the expense
of consumers. When the firm collude, they act like a monopoly and holds substantial power over
market and economy.

Advantages:

a. This gives each firm a huge market power to manipulate prices and market supply which
reduces uncertainty with respect to prices.
b. Increase in profits and reduction in other cost like marketing, administrative etc.
c. It restricts competition and provides monopoly to existing players

Disadvantages:

a. Collusion creates monopoly, it affects the interest of consumers negatively by resorting

to the restricted output and creating the artificial inflation on the products.
b. It decreases the competitiveness and fair play in the markets and discourages new
players.

Part B.

The reasons behind OPEC’s decision to cut oil supply are

a. The demand for oil fell steeply due to pandemic triggered shutdowns which led to fall in
demand, increase in surplus oil and higher storage cost.

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 b. Storing oil became more expensive compared to producing, the May benchmark for oil
fell into negative and the traders must pay to get rid of their oil.
c. Traders worried that the U.S., would run out of oil storage space.
d. The prices of the oil collapsed to record low.

The desired outcome of the supply cut decision was to increase the price of the oil, check the
falling price and stabilize the prices.

Changes in Demand and Supply curve before the decision:

Due to fall in demand for oil, the demand curve would shift largely to left ward and the supply
curve would slightly shift slightly/narrowly to right due to increase in the supply and buildup of
inventory. In this case there is ambiguity in market equilibrium since supply is greater than
demand. Therefore, this would lead to fall in the prices of oil.

Changes in Demand and Supply curve after the decision:

After the decision of the OPEC to cut the oil supply, the demand curve would shift
slightly/narrowly to right ward mostly because the markets will see a muted recovery and the
supply curve would slightly shift largely to left due to supply cut. In this case there is no
ambiguity in market equilibrium since supply is equal to demand. Therefore, this would lead to
increase in the prices of oil.

Part C.

OPEC operates in the oligopoly market structure in which only the few firms operate.

The key features of oligopoly market structures are:

a. Interdependence with competing firms: It implies that that the firms must consider
probable reactions of the rivals to any price cuts or increase in output/supply.
b. Price fixing: In oligopoly the firms can collude together to form a cartel in order to fix
the prices of the produce.

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 c. Market Power: Since few firms operates in the oligopoly structure this gives each firm
with huge market power which helps them to manipulate the market and restrict the
competition.

Question 2

Part A.

1. The Italian news website was producing 92 articles per month at the profit maximizing
level before Covid 19 pandemic.
2. The total profit was 2,500 Euro.
3. To the reach the profit maximizing level the firm should reach a status where MC
(marginal cost) = MR (marginal revenue)
Now, considering that the firm operates in a perfectly competitive market, the MR
curve will be a horizontal straight line
MR = TR (Change in total revenue) / Q (Change in Quantity) = 375 Euro
MC = TC (Change in total cost) / Q (Change in Quantity) = 375 Euro
The above means that when revenue generated from selling extra unit equals cost of
producing extra unit, the firm reach profit maximizing level and adding additional
resources will only increase cost and reduce profits.
The profit maximizing level for this form is No. of journalist = 8, articles per month =
92 and profits = 2500 euro.

Part B.

1. In the given scenario, 6 journalists must be fired. Because maximum profit/ profit
maximization is achieved when 4 journalists are employed.
2. The total new profit is 1500 Euro.
3. The reason behind firing the 6 journalist is because with each additional journalist the
profits will come down. Economies of scale is reached when 4 journalists are
employed. Since, profit = revenue-cost, considering if all the 10 journalists are

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 employed then the cost will overrun revenue and the firm loses money and firm
observes diseconomies of scale. In addition, profit maximization reaches at a point
when MC=MR and this is observed when 4 journalists are employed.

Question 3

Part A.

India would experience cyclical unemployment caused by fall in aggregated demand. Since,
the economy was shut down due to Covid-19 pandemic induced global lockdowns, economy
was initially hit by supply shock and then by demand shock. Lockdown has severely impacted
the consumption, which led to lower spending, travel ban and industries shutdown. This
phenomenon forced factories industries, organized and unorganized firms to layoff the staff
just to stay afloat.

Part B.

The recession is caused by fall in aggregate demand. Initially, we saw the recession due to fall
in supply however it soon converted into recession lead by fall in aggregate demand.

GDP = C+I+G+(X-M)

With the announcement and implementation of lockdowns there were complete ban on travel,
people were restricted from going out, the factories were closed, tourism and hospitality sector
was completely shut. This hampered liquidity in market and huge unemployment and
purchasing power was reduced. Instead of spending people started saving due to uncertainty in
future. Therefore, this caused the aggregate demand falls in the economy, the consumption (C)
and Investment (I) in the economy falls which contracts the GDP.

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 Part C.

Because of the above two phenomenon the Aggregate supply and Aggregate demand will fall.
Aggregate demand is the total aggregate output that is willingly to be bought at a given level
of prices and since due to unemployment and lock down restrictions, demand will fell as
people will be more tempted to save due to uncertainty. Aggregate supply is the total supply of
goods and services produced, due to supply shock, widespread supply chain disruptions
imports and production are disrupted, and the total supply fell.

Part D.

As seen from the above diagram AD and AS curve will shift to left. The X-axis is real GDP
and Y-axis is price level, the equation of GDP is GDP = C+I+G+(X-M). Therefore, when the
components like consumption spending, investments spending and spending on Exports minus
imports fell it impacts the AD curve and moves it to left wards. For, AS it will shift to left due
to price of key input rises, making a combination of lower output, high unemployment and
high inflation. The factors like supply chain disruptions also influences the AS curve to move
left wards.

Question 4

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 Part A.

The Government of India should adopt Expansionary macroeconomic policy. Government

should consider below measures

GDP = C+I+G+(X-M)

1. Since a lot of workers work in informal sector they are badly affected and have little
savings to tide over the shock, Government should put money directly in their accounts
through scheme like JAM (JanDhan Aadhar Mobile).
2. They should try to employee more people using social schemes like MNREGA.
3. Cut direct taxes which will boost savings, consumption (C) and investment (I).

Above three points will boost Consumption in economy.

4. For organized sector and MSME Government should try to provide banks with
adequate capital to lend and provide Interest subsidies so that the private sector would
increase Investment (I) and spending in economy.
5. Raising money for a sovereign state is easy, Government should raise money and fund
different project, especially healthcare related projects, to boost Government spending
(G).

Part B.

The Reserve Bank of India should adopt Quantitative Easing policy but, they need to strike a
balance between low inflation rates and stable economic growth.

They should consider below measures

1. RBI should buy long term bonds/securities from open market in order to increase the
money supply/liquidity and encourage lending and investment.
2. Increase in supply of money will lower interest rates which will help the borrowers to
get the money cheaply and this will boost the Investment and spending.

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 3. Provide credit line to ailing business or should buy securities/bonds.
4. RBI must keep inflation in tight control, when money supply is increased inflation
increases which might lead to stagflation. In this case RBI must ensure that inflation
should not drop or exceed the inflation target.
5. Lastly, RBI must maintain liquidity so that the exchange rates remain stable which will
help boost exports and increase investors sentiment.

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