Name

Question 1

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

Joint decision-making such a group is termed as a collusion.

Advantages of such decision-making could be the following:

 Competitive oligopoly could result in price wars and increased consumer surplus e.g.
one of the biggest advantage of OPEC is the control of oil prices which has an
immense impact on all economies / products at a global level.
 Dominant players can achieve economies of scale resulting in lower product prices in
the long run.
 Steady supply – another advantage could be steady supply of oil depending on the
market scenario e.g. when the WTI crude oil prices went into negative, people who had
purchased futures were forced to take delivery but they did not have the bandwidth to
store such high volume of oil.
 Lead to more investment in research and development.

Disadvantages of such decision-making could be the following:

Reduction in consumer choices because the demand and supply is determined by the
collusion as against normal market forces.
Cartel-like behavior reduces competition and can lead to higher prices.
Deliberate barriers to entry could be created.
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? Analyse the changes both before and after the decision to
reduce supply.

OPEC decided to cut the supply of oil as there are no demand of oil owing to lockdowns
imposed by various governments and factories being shut.

Since vehicles were also not plying there was no demand for petrol or diesel e.g. my personal
expenditure of petrol used to INR 12,000 per month but since Mar 2020, I am only refueled
petrol amounting to INR 5,000 as on date. When you multiply this with millions of customers
worldwide, one can gauge the impact of lock-down and WFH had on fuel consumption by a
regular household.

In view of the above, the supply had to be cut down else the oil prices would have crashed e.g.
the WTI crude went into negative a couple of times in Apr.

For Jul to Dec 2020, the total output cut will be eased to 7.7 million bpd followed by 5.8
million bpd adjustment for a period of 16 months, from Jan 2021 to Apr 2022.

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

An oligopoly is a market state where there are limited number of suppliers / producers /
distributors of a certain product. Thereby giving an edge to such group to determine the price
as well as the supply of the product in a manner that their interests are safeguarded. An ideal
example of an oligopoly is the Organization of the Petroleum Exporting Countries (“OPEC”)
where a limited number of countries (13 countries) have dictated oil production and prices to
the global economy.
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? 92 Articles

What was the total profit? EUR 2,500

Explain conceptually how you arrived at the profit maximizing level of output. You don't need
to show exact calculations. We arrived at the total revenue per month and reduced the total
revenue.

Write your answer for Part B here.

How many journalists would you have to fire? Assume that you only care about maximizing
profits. 6 journalists

What is your new total profit? EUR 1,500

Why did you fire the journalists? Explain your answer conceptually. You don’t need to show
exact calculations. The journalists were fired because additional resources would reduce the
total profit of the company. After 4 journalists, the revenue starts to dip. The company still
remains profitable up to 6 journalists but the revenue sharply starts to fall.

Question 3

Question 3A: What type of unemployment would a country like India experience from such a
pandemic? Please provide an explanation.

Cyclical unemployment exists when individuals lose their jobs as a result of a downturn in
aggregate demand.
When consumer demand for goods and services drops, it leads to a reduction in production.
This reduction lowers the need for workers, which causes layoffs. Consumers then have less to
spend, further causing a loss of revenue; in turn, this causes companies to lay off more workers
in attempts to maintain their profit margins.

If the decline in aggregate demand is persistent, and the unemployment long-term, it is called
either demand deficient, general, or Keynesian unemployment.

The stock market crash could be an effect of cyclical unemployment e.g. the tech crash in
2000s and the financial crash in 2008.

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

It is a demand-led-recession because the demand for overall consumption drops as consumers

intend to make for savings due to the uncertainty of the future and spend only on the important
goods required for sustenance e.g. groceries, medicines, healthcare, etc. and cut of other
expenditure such as tourism, luxury goods, entertainment, etc.

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

Aggregate demand would fall because consumers are less likely to spend more and as a result
the aggregate supply would also fall. Keynes' Law states that demand creates its own supply;
changes in aggregate demand because changes in the aggregate supply which would also be
low.

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

AD/AS curve shall move to the left due to lower demand and supply.
 Question 4

Question 4A: What type of macroeconomic policy should the Indian government adopt after
such a crisis? Please mention the policy measures to be undertaken clearly with explanations.

Monetary policy: The RBI should keep a low interest rate to increase cash in the market
which would result in more investment by businesses and thereby increase circular flow of
money.

Fiscal policy: In a recession, an expansionary fiscal policy involves lowering taxes and
increasing government spending. The Indian government had already reduced the corporate
income tax rates through the Income Tax Ordinance 2020 however further rate cut has not
happened.

Moreover, the tax rate for individual taxation needs to be reduced so that the spending
propensity of the individuals increase thereby increasing the flow of money in the economy.

Question 4B: What type of macroeconomic policy should the Reserve Bank of India adopt
after such a crisis? Please mention the policy measures to be undertaken clearly with
explanations.

The RBI should reduce the interest rate e.g. repo rate should be reduced by the RBI, CRR rate
could also be reduced to increase flow of money in the economy. The RBI may also purchase
government bonds to infect further liquidity.

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