Name TILOK CHAND

Email ID tilokd18@gmail.com

Question 1

Write your answer for Part A here.

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

Ans: 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.

Advantages of joint decision-making:

1. Production in Oligopoly market, by collusion, can manipulate and increase prices or

reduce cost in the market. Like OPEC during pandemic, when prices fell into negatives,
implying that people would pay to get rid of the oil, the decision to reduce the supply
helped to save cost.
2. Competitive Oligopoly could result in price war and increase consumer surplus. One of
the biggest advantage of OPEC is the control of oil prices which has an immense impact
on all products at global level.
3. The one more advantage is the supply of oil depending on the market scenario. When
the WTI crude oil 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.
4. Lead to more investment in research and development.

Disadvantages of joint decision-making:

1. Collusion leads to high prices for consumers leading to decline in consumer surplus.
2. New firms can be discouraged to enter the market.
3. Reduction in consumer choices because the demand and supply is determined by the
collusion as against normal market forces.
4. Cartel like behaviour reduces competition and can lead to higher prices.
5. Deliberate barriers to entry could be created.
6. There is a potential loss of economic welfare.
Write your answer for Part B here.

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.

Ans:

Reasons for OPEC to cut the supply of oil:

1. The demand of oil shrunk down due to the lockdown that lead to surplus of oil and
increased cost of storage. Traders were paying money to get rid of oil.

2. Shortage of storage space forced OPEC to cut supply

Desired outcome of the supply cut was to increase oil price which has fallen into negatives due
to record surplus because of lockdown.

Change in demand and supply curve before the decision: Due to the record fall in oil demand,
the demand curve would shift broadly to the left (D2) and supply would remain the same since
at this time, the decision to cut supply was not made. This would lead to fall in the price and
create surplus in the market

X
S
Excess supply

Price
D1
D2
Quantity Y

Change in demand and supply curve after the decision: After the decision to cut the supply,
the oil price would slightly increase however, of course not equal to before the pandemic. The
supply curve will shift (S1) and the new equilibrium increased the price and slight rightward
shift in the demand curve (D1) towards the end of the year.

X S1
S0

Price

D1
D0
Y
Quantity
Write your answer for Part C here.

What market structure does the OPEC operate in? What are the key features of such a market
structure?

Ans: OPEC operates in an Oligopoly market. 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.

Key features of Oligopoly market structure:

1. Only few large firms dominate the market

2. The product supplied can be identical like commercial airline and differential like soft
drink industry.

3. Restricted entry into the industry due to the existence of big players in the market.

4. Interdependence within the players in the market like change in price of pepsi would
affect coke.

Question 2

Write your answer for Part A here.

Assume that the business was operating at the profit maximising level of output before Covid-
19. Each article brought in ad revenue of €375

How many articles was the business producing?

Ans: 92 Articles as this is where marginal cost is equal to marginal revenue.

What was the total profit?

Ans: EUR 2500 i.e Total revenue minus the Total Cost (34,500 – 32,000)

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

Ans: To reach the 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 of articles.

3. Calculate Marginal revenue at each level by dividing 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.

Write your answer for Part B here.

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? Assume that you only care about
maximising profits?

Ans: The business would have to let go 4 employees as it if following profit maximization. The
new profit maximizing level has reduced to 54 articles per month as opposed to 92 articles
previously. Thus, this leads to 4 extra employees as per the current situation.

What is your new total profit?

Ans: The new total profit is EUR 1500 i.e. Total revenue minus the Total Cost (13,500 – 12,000)

Why did you fire the journalists? Explain your answer conceptually. You don’t need to
show exact calculations?

Ans: Reasons for the layoffs of journalists are:

1. 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 1500 than EUR
2500 previously.

2. 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 favour.
 3. 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.

Question 3

Write your answer for Part A here.

What type of unemployment would a country like India experience from such a pandemic?
Please provide an explanation

Ans: Cyclical Unemployment is the type of unemployment country like India would
experience due to 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.

Write your answer for Part B here.

What type of recession would be caused by such a pandemic? Provide an explanation

Ans: 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.

 Write your answer for Part C here.

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

Ans: In India, due to 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.

Write your answer for Part D here.

How will the AD/AS curves behave in this situation?

Ans:
In this situation, Aggregate demand curve will shift towards left due to the fall in demand.

In this situation, 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

Write your answer for Part A here.

What type of macroeconomic policy should the Indian government adopt after such a
crisis? Please mention the policy measures to be undertaken clearly with explanation

Ans: The type of macroeconomics steps Indian government should take after the crisis created
by pandemic:

Expansionary Fiscal Policies:

1. 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.

2. 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.

Write your answer for Part B here.

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.

Ans: The type of macroeconomics steps Reserve Bank of India should take after the crisis
created by pandemic:

Monetary Policies:

1. 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.

2. Reduce 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.

3. 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.