Name G Nikitha Nayak

Question 1

1A. The Phenomenon which involves joint decision making is known as Collusion.

Collusion takes place in an Oligopoly market structure which is operated by a few large firms where
they come together for their mutual benefits that is influencing the output and setting the price of a
product. OPEC is one such organization where 13 oil-producing member nations has colluded &
formed a formal Cartel.

The Advantages of Collusion are as follows:

1. Firms/Organizations collude with the intention of maximizing profit and reducing competitiveness of
the market.
2. During uncertain time, like recession, firms/organizations have the power to control supply which in
turn helps in keeping the price stable.
3. Since firms/organizations united as per this phenomenon, competitive advertising is avoided, thus
helping the firms to solely focus on production.

Although collusion is beneficial for /organization, it has some disadvantages over the economic
welfare. Some of these disadvantages are given below:
1. Collusion mainly implies high prices for consumers, thus leading to a decline in consumer surplus.
2.Entry of new firms/organization is highly restricted as the colluded firms/organizations act as one.

1B. OPEC reached a decision to cut oil supply to stop the falling prices of oil and similarly reduce
oversupply.

The desired outcome was complete market protection from the drop in demand due to lockdowns and
restrictions.

Changes in supply and demand following the cut in supply were characterized by low price elasticity of
demand and an inelastic supply curve.

The OPEC decided to cut the supply of oil to control and stabilize oil prices and to control the massive
oil stock builds. They decided to reduce the supply of oil by 9.7 million barrels per day from May 2020.
The result of the decision was spot crude oil prices rebounded in May from low levels registered in the
month of April. Crude oil future prices also bounced back in May, amid renewed optimism on the
outlook of global oil market fundamentals and expectations for a further recovery of oil demand and
tightening global supply. The supply decreased post the supply cut decision taken by the OPEC and
subsequent demand (which was already at low levels due to the decrease in the global demand among
the pandemic and subsequent measures taken by countries to control the spread) remained constant.
Resultantly, supply curve S moved left to SI while the equilibrium price level increased from P to PI
depicting an increase in the price levels from an historic low-price prevailing in April.
The equilibrium output levels would decrease from point Q to QI depicting a supply cut. The overall
equilibrium between demand and supply would shift from e to eI. If a market is not at equilibrium, then
economic pressures arise to move the market toward the equilibrium price and the equilibrium quality
by the phenomena of Invisible hand. This also might create a state of stagflation, which is a period of
rising inflation but falling output and unemployment.

1C. OPEC operates in an oligopolistic market structure. An oligopoly is a market structure in which a
few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated.

Key characteristics of this market structure include interdependence since actions and decisions
cannot be made independently, barriers to entry due to market dominance, strategy as the likely
response of a rival is to be anticipated, collusive oligopolies, product customization and the existence
of price rigidity.

Question 2

2A. The business was producing 92 articles per month.

Total Revenue = ad revenue per article * number of articles (92 * 375) = €34,500.

Total Profit = Total revenue – Total costs

= €34,500 - €32,000

= €2,500
 Operating at profit maximizing the business was producing between 92 articles monthly with 8
journalists since the profit maximizing option occurs at the maximum level of output (92)
giving the equilibrium level whereby the marginal costs is equivalent to the marginal revenue.
The marginal cost that is equivalent to the marginal revenue is €375.

2B. Given that the business only cares about profit maximisation, the new number of articles
that will be produced after the lockdown is 54 articles with 4 journalists since marginal costs
is equal to marginal revenue at that equilibrium level. Therefore,

Number of to fire = 8 journalists prior lockdown – 4 journalists during the lock down

=4

New Total profit:

Total Revenue = ad revenue per article * number of articles (54* 250) = €13,500.

Total Profit = Total revenue – Total costs

= €13,500 - €12,000

= €1,500

The journalists are fired since the new equilibrium level that maximizes profit changes to 54
articles with 4 journalists since the marginal costs are equivalent to marginal revenue at this
point. The marginal costs equal to marginal revenue are € 250.

Question 3

3A. India’s economy is likely to experience cyclical unemployment rates due to the impacts of
the pandemic on the economy’s business cycle. Cyclical unemployment usually results from
economic downturns and contractions such as the one caused by the COVID 19 pandemic.
This would happen as the aggregate demand in the Indian economy will decrease due to an
economic downturn. As, is the case in any recession consumers are less likely to spend, this
would lead to a smaller number of people required to fulfill (supply) the demand.

3B. The coronavirus pandemic has triggered a prolonged boom in the economy than ever
before. Thus, the pandemic is likely to cause an L-Shaped recession that is characterized by
steep declines and extended recession. A supply-led recession or a supply shock globally
followed by a demand led recession or a demand shock would be created.

3C. Cyclical unemployment is likely broad within the aggregate demand and aggregate supply
framework. This is in which case the equilibrium falls below the expected GDP and similarly
less when the equilibrium is closer to potential GDP. A fall in the Indian GDP indicates the
economy’s dip into recession with the AS/AD equilibrium level of sustainable domestic
product falling below the expected potential. The aggregate supply would fall as labor stayed
away from work due to unemployment or restriction on mobility resultantly the demand would
fall in the short run as the lockdown period is extended and the people would have lower
consumption appetite.

3D. In the case of cyclical unemployment and supply led recession followed by demand led
recession, the AD/AS curves would behave as:

A reduction in AD from AD0 to AD1 causes a leftward shift in the aggregate demand curve.
This reduction would lower the GDP (Y1 to Y0) and price levels (P0 t0 P1) which would lead
to economic contractions, making demand fall below the economy’s potential GDP, and hence
causing a recession. Moreover, the real GDP then falls and so does the equilibrium price
level. Due to a reduction in demand and price levels, businesses would cut their workforce
hence increasing the unemployment rate.
 Relatively low cyclical unemployment for an economy would occur when the level of output
would be close to potential GDP, at the equilibrium point E0 between AD0 and AS , on the
other hand, high cyclical unemployment would arise when the output is substantially to the left
of potential GDP on the AD/AS diagram, where the curve moves from AS0 to AS1 and the
price level will set at a higher price level from P0 to P1.

Question 4

4A. Indian Government should adopt an expansionary fiscal policy in case of such a crisis.
During a recession, the government would opt for a fiscal policy which has a higher multiplier
effect and also shifts the aggregate demand curve to the right.
Small to medium enterprises required a multi-prolonged effort. Therefore, India’s government
should adopt a policy that advocates for infusion of cash to pay accumulated arrears of these
enterprises. In addition, banks should also be allowed interest subsidies to enable reduction of
credit on SMEs loans. Protection of workers in the informal sector through Mahatma Gandhi
National Rural Employment and Jan Dhan accounts. These systems operate as automatic
stabilizers in a way that the unemployed persons can apply for jobs when they need them. For
firms operating in the organized sector, banks should me made less risk averse in lending
while also maintaining the authority to determine the viable and non-viable firms.

4B. The Reserve Bank of India should adopt a dovish monetary policy, that is an expansionary
monetary policy. This policy should be regulating money supply and interest rates and buying
Government bonds to increase money supply.

Macroeconomic policies that should be adopted by RBI include easing liquidity since the
direst need is offering credit to the hurting businesses. With this approach, RBI will be obliged

to take cues from other central banks since liquidity should not be a constraint. Similarly, RBI
should relax the non-performing assets norms. The financial services sector is looking to RBI
to offer relief, a plan that also includes deferment of NPA classification norms. This way, the
banking system could enjoy some comfort away from the under-capital and increased debts.
Lastly, RBI could offer liquidity support to Indian banks on foreign operations and also widen
the re-finance opportunity for both small-medium and large enterprises as way of enabling
them settle their debts.