Name Dr.

Mannam Sreedevi

Question 1

Part A:
The Phenomenon which involves such joint decision making is called Collusion. Collusion is an
agreement between firms in the market to avoid competition. Collusion takes place in an Oligopoly
market where firms control the output and prices of the products. OPEC is an example of such
organization.
Advantages:
• Avoid direct competition
• Maximum/higher profits
• Price stability
• Reduction of market uncertainty

Disadvantages:
• High prices for consumers
• Restrict entry of new firms into the market

Part B:
• Due to the Pandemic the whole world went into lockdown, due to which there is a sharp fall
in demand for crude oil with the current supply. OPEC decided to cut down crude oil supply
to stabilize the fall in prices.
• Demand curve was shifted to leftwards as consumption of crude oil was less due to
lockdown restrictions, but the decision to cut supply of crude oil also resulted in leftward
shift of the supply curve.
Analysis of OPEC Decision:
Before:
Demand curve was shifted to leftwards as consumption of crude oil was less due to lockdown
restrictions (refer graph below)

After:
The decision to cut supply of crude oil resulted in leftward shift of the supply curve. Despite cutting
the crude oil supply, OPEC couldn’t fully achieve the desired outcome as it was faced with an
inelastic demand. This was because the consumer countries were faced with surplus stock of crude
oil and could not take in more supply. Consequently, the crude oil price not stabilized as predicted
by OPEC (refer graph below).
Part C:
OPEC operates in an Oligopoly market structure. The key features of oligopoly market are
1. Firms under oligopoly are interdependent.
2. Firms can influence the prices and quantities.
3. High barriers to entry for new firms.
4. The firms under oligopoly may produce homogeneous or differentiated products.
Question 2
Part A:
• Italian news website business was producing 92 articles with 8 journalists at the profit
maximizing level of output before COVID-19.
• The total profit was €2500
• Profit maximizing level of output is arrived by calculating the equilibrium point where
marginal cost is equal to the marginal revenue.
Part B:
• I would fire 4 journalists as profit maximum level is achieved at producing 54 articles with
4 journalists due to lockdown.
• The total profit was €1500
• Before COVID-19, Italian news website achieved profit maximum level at producing 92
articles with 8 journalists. During to COVID-19 lockdown, profit maximum profit level is
achieved at producing 54 articles with 4 journalists. Hence, I will fire additional 4 journalists.
Profit maximum level is the equilibrium point where marginal revenue is equal to marginal
cost.

Question 3

Part A:
• India would experience cyclical unemployment. Due to COVID-19 Pandemic, there
was a left shift in aggregate demand which in turn lowers the profit of the firms, which led to
lay off workers and increasing the unemployment rate.
• However, this unemployment is temporary and once the economy recovers, firms will start
employing the people to meet the risen aggregate demand.
Part B:
• Due to lockdown restrictions during COVID-19 pandemic, initially the recession started
as a supply shock recession which gradually converted into a demand led recession.
• The restrictions imposed by government such as lockdowns, social distancing, wearing
masks, to control the pandemic caused major disruption in the supply chains which led to a
fall in aggregate supply and thus leading to supply shock recession.
• Due to lockdown restrictions, profits of the firms were reduced, and firms had to lay off
workers which led to a sharp fall in aggregate demand. This cyclical unemployment converted
the recession into a Demand led recession.
Part C:
• The aggregate demand would fall due to mass unemployment, reduction in
purchasing power and bankruptcy caused by the pandemic.
• The aggregate supply would also have a fall as there is a reduction in investment, disruption
in supply chain.
Part D:
• The pandemic was both a supply shock recession and a demand led recession.
• The aggregate supply had fallen caused by disruption in supply chain, reduction in
investments etc. resulting the AS curve to shift to the left.
• The aggregate demand had fallen due to unemployment, reduction in purchasing
power and bankruptcy resulting in leftward shift of the AD curve.
 Question 4

Part A:
The government should adopt expansionary fiscal policy. Expansionary fiscal policy is
implemented during times of recession or slow economic activity in order to
stimulate the economy and increase aggregate demand. Government can use following tools
whiles implementing expansionary fiscal policy.
Taxation:
Government can reduce the tax burden during pandemic which can improve the purchasing
power of citizens.
2. Government Spending
The government can increase its spending by providing subsidies to support economic activity
thereby increasing the aggregate demand in the economy.
One example of the expansionary fiscal policy by the India government is Atmanirbhar Bharat
Abhiyan to promote local manufacturing and reduce dependence on imports in various sectors,
including defense, technology, and agriculture. It aims to create a self-sufficient India that is
strong, and economically stable.

Part B:
• The Reserve Bank of India should adopt an expansionary monetary policy to inject
cash/liquidity into the market. The purpose of monetary policy is to shape the investment
and spending decisions of consumers and businesses through changing the money supply
and interest rates of an economy.
• RBI can achieve its objectives in two ways: Regulating money supply and regulating
interest rates.

The primary tools RBI can use to regulate the flow of cash in the economy are
Open market operation: The RBI can purchase bonds and securities from open market
and infusing cash into the economy which is also known as Quantitative Easing.
Repo rate: Repo rate is the rate at which commercial banks borrow money from RBI. During
recession RBI can lower its repo rate and make it easier for banks to borrow more from RBI
thereby making loans cheaper for public.
Reverse repo rate: Reverse repo rate is the rate at which RBI borrows money from
commercial banks. During recessions, RBI can reduce the reverse repo rate to encourage banks to
deposit less with RBI thereby increasing liquidity and infusing cash into economy.
Cash reserve ratio: Cash Reserve Ratio (CRR) is a ratio fixed by RBI at which all banks must
maintain a minimum cash reserve. During recessions, RBI can reduce the cash reserve ratio to
increase credit creation which in turn will increase the money supply into economy.

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