Name Sumit Mudgil

Question 1

Write your answer for Part A here.

Oligopolistic collusion is the phenomenon which involves such joint decision making. The
global oil market is an oligopoly, with a few large corporations dominating most of the
world’s oil supply. Their product is identical i.e. all of these firms offer the same product
which is Crude oil. Entry into this market is restricted due to the scarce availability of natural
resources and the existence of big players such as Arab Countries and Russia in the market.
Organization of Petroleum Exporting Countries reduced oil supply to cope up with the fall in
demand during COVID-19 Lockdown.

‘OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in
order to secure fair and stable prices for petroleum producers; an efficient, economic and
regular supply of petroleum to consuming nations; and a fair return on capital to those
investing in the industry’. (Source )

Advantages

• It is beneficial for the producers as they can manipulate the prices and reduce their
costs thereby maximising profits.
• It eliminates the risk of a price war between competitors.

Disadvantages

• Such collusion is unfair to the consumer as it allows the producers to manipulate prices
thus making the forces of demand and supply rather ineffective.
• Eliminates healthy competition which is essential to set prices according to the actual
value of products.
Write your answer for Part B here.

OPEC decided to cut oil supply in 2020 due to the sharp fall in demand resulting from the
lockdowns imposed all around the world. The world was struggling to deal with the Covid-19
pandemic, and the global economy had been brought down to its knees. Almost all the
countries had some form of lockdown imposed, which led to the decrease in demand for oil in
the global market.

The fall in demand let to increase in oil reserves of OPEC members, and the storage costs were
rising as well. As the demand became negative, some traders had to give money to dispose the
oil that they had extracted, leading to losses being incurred.

The fall in demand and increase in supply would have resulted in lowered prices of oil in the
market, thus making it less profitable for OPEC members. Thus, in order to avoid losses due to
storage costs and to stabilize the prices of oil in the global market, OPEC decided to cut the
supply of oil by 9.7 million barrels per day.

Change in demand and supply curve before decision:

S
D2
Excess
Supply
Price

D1

Quantity
The demand curve has shifted towards the left due to fall in demand during lockdown. The
supply curve has not changed as at this point the decision to cut supply was not made. This
would lead to a fall in price and create surplus in the market.

Change in demand and supply curve after the decision:

S1

S0

D1
Price

D0

Quantity

The supply curve has shifted (S1) after the decision to cut supply leading to an increase in oil
prices and the demand curve had shifted rightwards towards new equilibrium.

Write your answer for Part C here.

OPEC operates in an oligopoly market structure. The global oil market is an oligopoly, with a
few large corporations dominating most of the world’s oil supply. Their product is identical
i.e., all these firms offer the same product which is Crude oil.

Features of Oligopoly Market:

• There are few large firms that dominate the market.

• A product can be identical, as in the example of telecommunication providers, or

differentiated, as in the example of pizza chains.

 • Entry into the industry is restricted because of the existence of big players in the

market.

Question 2

Write your answer for Part A here.

No. of Fixed Cost per Variable Cost per Total Cost per
Journalists Articles per Month Month Month Month Average Total Cost Marginal Cost Revenue Marginal Revenue MR-MC Total Profit
1 15 8000 3000 11000 11000.0 3000.0 5625.0 5625.0 2625.0 -5375
2 29 8000 6000 14000 7000.0 3000.0 10875.0 5250.0 2250.0 -3125
3 42 8000 9000 17000 5666.7 3000.0 15750.0 4875.0 1875.0 -1250
4 54 8000 12000 20000 5000.0 3000.0 20250.0 4500.0 1500.0 250
5 65 8000 15000 23000 4600.0 3000.0 24375.0 4125.0 1125.0 1375
6 75 8000 18000 26000 4333.3 3000.0 28125.0 3750.0 750.0 2125
7 84 8000 21000 29000 4142.9 3000.0 31500.0 3375.0 375.0 2500
8 92 8000 24000 32000 4000.0 3000.0 34500.0 3000.0 0.0 2500
9 99 8000 27000 35000 3888.9 3000.0 37125.0 2625.0 -375.0 2125
10 105 8000 30000 38000 3800.0 3800.0 39375.0 2250.0 -1550.0 1375

• The business was producing 92 articles as this is where the Marginal cost is equal to
the marginal revenue.
• The total profit of the business was EUR 2500 (Total Revenue- Total Cost -> 34500-
32000)
• The profit maximising level can be achieved by:
1. Identifying the fixed cost and calculating the variable costs per month
i.e., Fixed cost = EUR 8000 and variable cost = EUR 3000 x number of
journalists. Add both to arrive at total cost at each output level.
2. Calculate marginal cost by dividing change in total cost by change in
output.
3. Calculate revenue by multiplying price by number of articles at each
output level
4. Calculate marginal revenue by dividing change in revenue by change in
output.
5. Calculate difference between MR and MC.
 When the difference between Marginal Cost and Marginal Revenue is zero, that output
level is the profit maximising level.

Write your answer for Part B here.

No. of Fixed Cost per Variable Cost per Total Cost per
Journalists Articles per Month Month Month Month Average Total Cost Marginal Cost Revenue Marginal Revenue MR-MC Total Profit
1 15 0 3000 3000 3000.0 3000.0 3750.0 5625.0 2625.0 750
2 29 0 6000 6000 3000.0 3000.0 7250.0 3500.0 500.0 1250
3 42 0 9000 9000 3000.0 3000.0 10500.0 3250.0 250.0 1500
4 54 0 12000 12000 3000.0 3000.0 13500.0 3000.0 0.0 1500
5 65 0 15000 15000 3000.0 3000.0 16250.0 2750.0 -250.0 1250
6 75 0 18000 18000 3000.0 3000.0 18750.0 2500.0 -500.0 750
7 84 0 21000 21000 3000.0 3000.0 21000.0 2250.0 -750.0 0
8 92 0 24000 24000 3000.0 3000.0 23000.0 2000.0 -1000.0 -1000
9 99 0 27000 27000 3000.0 3000.0 24750.0 1750.0 -1250.0 -2250
10 105 0 30000 30000 3000.0 3000.0 26250.0 1500.0 -1500.0 -3750

• The business would have to fire 4 journalists in order to achieve the profit maximising
level of 54 articles.
• New total profit is EUR 1500.
• The journalists needed to be fired in order to reach the profit maximising level of
output i.e., 54 articles per month. In the pre-lockdown period, the business employed 8
journalists to produce 92 articles per month @ EUR 375 per article. But the lockdown
reduced the price to EUR 250, which led to decrease in profit levels while the variable
cost per extra journalist remained the same. In order to match the total revenue and
total costs in such a way that the MR = MC, the company has to decrease production to
54 articles per month.
And for producing 54 articles, only 4 journalists are required. Thus company has to fire
4 journalists (8-4).

Question 3

Write your answer for Part A here.

India would experience a cyclical unemployment from the Covid-19 pandemic. The major
reason for unemployment during the pandemic was the lockdown that was imposed to keep the
spread of the virus in check. A major part of Indian population in employed in the informal
sector, construction work, small businesses etc. Due to the lockdown, these informal workers
became unemployed.

Considering that the lockdown is a short term situation, these workers will get their respective
jobs back once the lockdown uplifted.

That means this type of unemployment is cyclical.

Write your answer for Part B here.

• This pandemic would cause a Demand-led recession. A demand-led recession occurs

when there is a lack of demand in an economy, which in this case is caused by the

increase in unemployment levels, decrease in income of majority of population. This

decrease in income led to the reduction in demand and spending limit of the consumers

leading to a fall in aggregate demand.

Write your answer for Part C here.

The aggregate demand and aggregate supply both saw a decrease in India due to the pandemic.

• The aggregate demand decreased due to the decrease in consumption by consumers

owing to the loss of income.
• The aggregate supply remained same at the start of the pandemic but as the aggregate
demand fell, it led to a surplus in the market which in turn led to reduction in supply to
reach equilibrium.
 Write your answer for Part D here.

• The AD curve will shift to left due to the sudden fall in demand.
• Initially, there will be downward movement in the Aggregate Supply along the curve,
but after some time the AS curve will shift towards left to meet the new Aggregate
Demand.

Question 4

Write your answer for Part A here.

The government should adopt the Expansionary Fiscal Policy which is implemented during
times of recession or slow economic activity in order to stimulate the economy and increase
aggregate demand.

Measures to be taken:

• Increased Government Expenditure: The govt should spend more in public welfare
schemes so that there is adequate flow of money to the public. The public will then
spend this money for consumption which sets into motion a multiplier effect leading to
increase in demand and supply.
• Reduction in Taxes: The government should decrease taxes so that the public is left
with more money in hand to be used for consumption.

The government should focus on increasing consumption in the economy.

Write your answer for Part B here.

The Reserve Bank of India should follow the concept of Quantitative Easing in its Monetary
Policy:
• Influx of money: The RBI should introduce new money in the economy by different
ways such as purchase of govt bonds so that the population has more money to spend.
• Regulate Interest Rates: The RBI should control the interest rates such as repo rate,
reverse repo rate in order to encourage banks to lend more money to the public leading
to increased consumption in the economy.