Name Amrita Narayan

Question 1

Part A
The phenomenon which involves joint decision making is collusion in oligopolies and thus a
cartel is formed which in our case is OPEC. By definition, when there are few players in a
market, firms are able to come together to influence output and price of a product, this is
known as collusion. A cartel is formed by a group of firms who have colluded.

Advantages suppliers:
▪ Joint profit –firms in an oligopoly are independent, which gives rise to the potential of joint
profit maximization.
▪ Reduces uncertainty- strategic decisions regarding output and prices are made which in turn
reduces uncertainty.
▪ Lowers competition costs- spending on marketing and advertising as products are not
differentiated.
▪ Extra profit can be used for research and innovations of the product.

Disadvantages suppliers:
▪ High prices- high price may lead to decline in consumers.
▪ Cheating cartel members- there are scenarios where collusion became ineffective due to high
profits and lazy mentality and ultimately leading to less innovations and cheating. This is where
game theory of cheating firm comes into play.

Advantages consumers:
▪ Price stability for the consumers –as collusion have the fear of losing consumers so they try to
keep a price stability in the market.
▪ More refined ad innovative form of products.

Disadvantages consumers:
▪ The form of collusion can trigger higher prices for the products.
▪ There also can be decision-making bias and irrational behavior as they have removed the threat
of competition from the market and they try to act as monopoly.
▪ There may be scenarios of deliberate entry barriers in the market which will not allow new firm
to enter the market.

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 Part B

Reasons for OPEC to cut the supply of oil:

• The demand of oil shrunk down due to the lockdown that led to surplus of oil and increased
cost of storage. Traders were paying money to get rid of oil.
• 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 due to worldwide 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 as per the below graph.

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.

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 Part C

OPEC operates in an Oligopoly market. Key features of such a market are:

• Only few large firms dominate the market

• The product supplied can be identical like commercial airline and differential like soft drink
industry
• Restricted entry into the industry due to the existence of big players in the market.
• Interdependence within the players in the market like change in price of Pepsi would affect
coke.
• Prevalent advertiser like advertisements during cricket world cup

Question 2

Part A

• Considering the business was operating on maximum profit, it was producing 92 articles as this is
where marginal cost is equal to marginal Revenue.
• The total profit was EUR 2,500 i.e., Total Revenue minus the Total Cost (34,500-32,000)
• To reach at profit maximizing output, following steps were followed
▪ 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.
▪ Identify Revenue at each level by multiplying price of each article and number of articles.
▪ Calculate Marginal Revenue at each level by diving Change in Revenue by Change in Output.
▪ 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.

Part B

• 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.
• The new Total Profit is EUR 1,500 i.e., 13,500 minus 12,000

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 • Reasons for the layoff of journalists are:
▪ 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 1,500 than EUR 2,500 previously.
▪ 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 favor.
▪ 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 (8 minus 4 journalists)

Question 3

Part A

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

Part B

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

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 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.

Part C

In India, due to the 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.

Part D

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

The AD/AS curve would behave as:

• A reduction in AD causes a leftward shift in the Aggregate demand curve. This reduction would
lower the GDP and Price levels which would lead to economic contractions, making the 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.

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 Question 4

Part A

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

Expansionary Fiscal Policies:

• 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.
• 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.

Objectives of fiscal policy in general is to provide:

a. Maintain and achieve full employment, stabilize the price level

b. Stabilize the growth rate of the economy.
c. Maintain equilibrium in balance of payments and promote economic development.

However, fiscal policy in India has two objectives- improving growth and ensuring social justice to
people of India.

Part B

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

Monetary Policies:

• 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.
• 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.

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