Name Sukhvinder Kaur

Email ID sukhvindertaak@gmail.com

Question 1

Write your answer for Part A here.

Collusion is the phenomenon which involves in such joint decision-making, where two or more
firms can join hand to tacitly set the prices higher than normal in a coordinated action. An
explicitly communicated collusion in the form of a formal agreement is called a cartel. OPEC
is the famous legal cartel; it contributes to around 44% of the global oil production.

Advantages:

• Maximize joint profit: Cartel can help the members to deliberately drive-up prices by
lowering the units of output they produce. Which leads to the increase in the price of the
goods at which they want to sell, thereby maximizing their profits.
• Lower competition costs/Monopoly Power: Cartel enjoys monopoly power as they
restrict competition. They can further charge different prices in different market based
on the degree of monopoly.
• Economies of Scale: Cartel members tend to experience economies of scale as their
manufacturing processes improve, which helps in lowering their cost per unit while
boosting their output.

Disadvantages:

• Absence of constancy: A cartel is unconstrained organization and don’t have full control
over their members. If the interest of the members not served, they may exit the cartel
anytime, hence, they are fragile and lack stability.
• Incompetence to stabilize demand: Cartels have not been able to stabilize demand in the
market, they have proven unsuccessful in preventing the fluctuations in demand.
 • Lack of Competition: Under cartels lack of competition leads to price fixing and a lack
of innovation, companies are not interested in innovations.

Write your answer for Part B here.

The OPEC decided to cut the oil supply due to decrease in global market demand of oil. The
COVID-19 pandemic restricted the economic activities which leads to surplus of oil in the
market. This surplus of oil, combined with reduce demand caused oil prices to collapsed historic
low. It had severe implications on oil producing countries who depend on oil revenues to support
their economies. OPEC decided to reduce the oil production to 9.7 million barrels a day from
May 2020.

The production cuts by OPEC were intended to address the oversupply situation and support
oil prices by removing excess barrels from the market. The objective was to establish a more
favorable supply-demand equilibrium that would support higher oil prices. This would help to
ease the financial stress on oil-producing countries who heavily dependent on oil revenues. As
the supply reduces, the crude oil price rebound in May 2020 as compared to low price in April,
In the new environment, the situation was considered optimistic for the global oil market and
expected further recovery of oil demand which would strengthen global supply.

Change in Supply and Demand curves of oil and subsequent market equilibrium:
 ▪ In the above figure the price is measured on Y-axis, and quantity on the X-axis. The
initial equilibrium point is E where demand curve for oil DD intersects the supply curve
for oil SS, at price level OP and quantity level OQ.
▪ The supply decreased post the production cut decision of the OPEC and subsequent
demand remains constant, as a result the supply curve SS moved to the left to S2S2, while
the equilibrium price level increase from point OP to OP2 showing increase in the price
level.
▪ The equilibrium output level decreases from point OQ to OQ2 showing the reduction in
supply, the whole equilibrium would shift from point E to E2.

Analyses the changes after and before the supply reduction decision:

▪ Before the supply reduction decision, the global oil market was characterized by
oversupply. This surplus was caused mainly by increased shale oil production in US and
maintaining higher market share by OPECs by keeping the production levels high. As a
result of surplus, the oil prices reached historically low when the future USA WTI
benchmark went negative on April 20th, 2020, the price drop to $36.98 per barrel which
was lowest since Dec 28th, 2018, at $45.15. With an unprecedented collapse in global
oil demand due to the COVID-19 pandemic and exacerbated by a price war between
Saudi Arabia and Russia, OPEC made a historic decision to implement significant
supply cuts of 9.7 million barrels per day.
▪ After the supply reduction decision by OPEC, they have succeeded in stabilizing oil
prices (as WTI crude rebounded from its lows and settled at around $40-$50 per barrel
in the second half of 2020*), reducing excessive inventories, and rebalancing the market
by aligning supply with demand. The decision exemplified OPEC's ability to coordinate
production cuts among its member countries and collaborate with non-OPEC allies to
address market challenges.

Write your answer for Part C here.

The OPEC operates in Oligopoly market structure. Oligopoly is a type of imperfect competition,
where there are few firms dealing either in homogenous or differentiated products. The term
Oligopoly is derived from two Greek words – ‘Oligi’ meaning ‘few’ and ‘Polein’ meaning ‘to
sell’, thus, it means the control of the few firms in the market. In oligopoly market situation the
number of big sellers of a commodity is less and the number of buyers is more. A key
characteristic of an oligopoly market is that none of these firms can keep the others from having
significant influence over the market.

The Key Features of Oligopoly:

• Existence of few sellers: One of the primary features of oligopoly is the existence of a
few sellers who dominate the absolute industry and greatly influence the prices of each
other firms, moreover there are large numbers of buyers. But each of the firms under
this market produces a significant part of the total output and competes with each other
severely and tries to manipulate their product’s price and volume to outwit each other.
• Impediments in entry: The firms under oligopoly competition cannot easily enter in the
market; nor they can make an exit. The reasons for difficult entry in the market are
various legal, social, and technological barriers. Existing firms have complete control
over the market.
• Identical or differentiated products: This implies that firms can either produce
homogenous products or differentiated products under oligopoly. If firms produce
homogenous products, it is said to be pure oligopoly whereas, the firms producing
heterogeneous products are known as imperfect oligopolies.
• Mutual interdependence: Under oligopoly market structure, mutual interdependence
refers to the influence that firms create on each other’s decision, such as pricing and
output decisions. In oligopoly, a few numbers of firms compete with each other,
therefore, the sale of a firm is dependent on its own products price, as well as the price
of its competitors’ products. Thus, no firm can make independent decision under
oligopoly.
• Price setting power: Under oligopoly, dominant market player is influential enough to
decide on the price of the products and rest business players follow the same. It helps
them to avoid price war and price rigidity, as all firms stick to agreed decision hence
price stability in industry.
 • Selling Costs: Since firms under oligopoly try to avoid price competition and there is a
huge interdependence among firms, selling costs are highly important for competing
against rival firms for a large market share. The firms under oligopoly market focus
more on their advertisements and other sales promotion techniques. The role of selling
cost in the sale of products is more than its role in a monopolistic competition market.
• Indetermined demand curve: Unlike other market structures, under Oligopoly, it is not
possible to determine the demand curve of a firm. As the firms under this market are
interdependent, the action of one firm severely influences the action of other rival firms.
Therefore, the demand curve of an oligopoly market keeps on changing or shifting and
is certainly not definite.

Question 2

Write your answer for Part A here.

➢ Assuming that the business was operating at the profit maximizing level of output before
Covid-19, the business was producing 92 articles where their marginal revenue (MR)
equals to marginal cost (MC). The business will continue producing articles as long as
the revenue from each additional article exceeds the marginal cost. We can determine
that the profit-maximizing level of output occurs when the number of journalists is 8,
which corresponds to producing 92 articles per month. At this point, the marginal
revenue (€375) was equals to marginal cost (€375).
➢ The business was producing 92 articles per month before Covid-19, resulting in a total
profit that can be calculated as follows: Total Profit = (Total Revenue per month - Total
Cost per month). Total Profit = (€34500 - €32000) = €2500. The total profit was €2500
at the profit maximization level.
➢ Steps to arrive at the profit maximizing level of output:
• To determine the profit-maximizing level of output, we need to find the point
where the marginal revenue equals the marginal cost.
• In this scenario, the marginal cost represents the cost of producing one
additional article. Its business consists of two components: the wages of the
 journalists (€3000 per month) and the office building/utilities costs (€8000 per
month). As we increase the number of journalists, the total cost of wages
increases.
• On the other hand, the marginal revenue represents the additional revenue
generated by producing one more article. Each article brings in ad revenue of
€375. By examining the given data, we can observe the relationship between the
number of journalists and the corresponding number of articles produced.
• To find the profit-maximizing level of output, we compare the marginal revenue
(€375) with the marginal cost at each level. We need to find the point at which
these two values are equal, and that point represents the optimal level of
production where the business maximizes its profit.
• With the help of above phenomena, we reach to the conclusion that for the firm
to arrive at profit maximization level of output, it needs to come at the point
where their Marginal Revenue (MR) = Marginal Cost (MC). It would happen
when below conditions meet:
1. No. of Journalist- 8
2. Articles per Month- 92
3. Total Profit- €2500

Profit Maximization
800

600

400

200

0
0 20 40 60 80 100 120

Marginal Cost Marginal Revenue

 • In the above figure, X axis is quantity and Y axis is price. We can state that the
profit maximization for perfectly competitive firm will achieve when it produces
at the quantity of output where P=MC.

Write your answer for Part B here.

➢ As Italy went into lockdown, the firm adopt a ‘work from home’ policy. Due to change
in the fixed cost (eliminated office building and utilities cost €8000 per month) and total
revenue (ad revenue per article reduced to €250), the profit maximization level of output
has change, now their marginal revenue (MR) equals to marginal cost (MC) at the
number of journalists=4 and number of articles=54. To maximize the profit at given
market conditions we need to fire 6 journalists.
➢ Under the new conditions of the lockdown, the business is producing 54 articles per
month, resulting in a total profit that can be calculated as follows: Total Profit = (Total
Revenue per month - Total Cost per month). Total Profit = (€13500 - €12000) = €1500.
The new total profit is €1500 at the profit maximization level. The total cost can be
calculated with formula: (Fixed cost per month + Variable cost per month), and total
revenue can be calculated by multiplying numbers of article per month with reduced ad
revenue per article.
➢ Why fire the journalist:
• One of the major reasons to fire 6 journalists, is to lower its costs. During the
lockdown, the ad revenue per article decreased to €250, this reduction in
revenue means that the business cannot sustain the same level of costs, including
journalist wages, and still maintain profitability. Firing journalists helps
decrease the overall wage expenses, reducing the financial burden on the
business.
• At the marginal cost of €250, where the number of journalists is 4, we have met
the profit maximization condition. The primary goal of any business is to
maximize profits, as the ad revenue per article decreased, the business needs to
adjust its operations to ensure that it remains profitable during the lockdown
period. By reducing the number of journalists, the business can align its cost
 structure with the reduced revenue, adjusting the balance between costs and
revenue to maximize overall profit.
• Any further increase in the number of journalists from 4, would create the
condition where marginal cost will be great than marginal revenue (MC>MR).
The cost of creating additional number of articles would be more than the
revenue expected to generate from them, hence this is an undesirable condition
to operate in.

Profit Maximization
600
500
400
300
200
100
0
0 2 4 6 8 10 12

Marginal Cost Marginal Revenue

Firing the journalists was a decision made to align the cost structure with the reduced revenue.
Its aim was to reduce costs, maximize profits, adapt to the challenging business environment,
and ensure the long-term sustainability of the business.

Question 3

Write your answer for Part A here.

The India will experience cyclical unemployment from Covid-19 pandemic in earlier stage. Due
to economic downturn, the aggregate demand in the Indian economy will decrease. As in the
any case of recession businesses are likely to spend less money, this would lead to small number
of workers required to fulfill the demand. As a result, industry won’t have enough jobs available
for the work force in the market.
Now, if the firms believe that the economy will slow down and enter in recession, they will hire
a smaller number of labors at any given wages and the labor demand curve shift to the left.

• In the market where wages are not decreasing, a fall in the demand of the labor from D0
to D1, leads to a decline in the quantity of labor demanded at the original wage (W0)
from Q0 to Q2, which happened during the pandemic.
• Particularly, in short run, wages are often said to be sticking downward. Keynes argued
that in a recession, wages did not fall to restore equilibrium with falling prices, this leads
to real wage unemployment. The labor while willing to work at the normal wage (W0),
they will not be able to find the jobs.
• The pandemic will also lead to frictional unemployment in later stage, as many
businesses may shut down or reduce their workforce, leading to increased job
separations. As a result, individuals who lose their jobs may take some time to find new
employment, leading to frictional unemployment.

Write your answer for Part B here.

India will have supply led-recession followed by demand led-recession in pandemic. Recession
could be brought about by a significant decrease in demand or by a severe reduction in supply
which is referred to as a shock.

Supply Led-Recession:

• The first supply shock triggered when India went into two months lock down, there was
loss of economic output. Pandemic restriction like travel bans, lockdown and quarantine
measure disrupt global and domestic supply chain. This disruption affects the flow of
raw material, intermediate goods and finished products, causing production delay and
shortages. Industries relying heavily on import or global supply chains in India such as
manufacturing, experienced loss of output and revenue.
• The pandemic also disrupts the labor supply in India, leading to reduce in productivity
and output. Factors like quarantine measure, increased absenteeism due to illness, and
restrictions on mobility have impacted industries heavily reliant on labor such as
healthcare, hospitality, and manufacturing, which result in low production and reduce
economic growth.

Demand Led-Recession:

• During the pandemic, people tend to prioritize essential goods and services while cutting
back on optional spending, this decline in consumer spending affects various sectors in
the economy, like travel, entertainment, retail, and hospitality. As a result, businesses in
these sectors experience lower revenues and are forced to lay off workers or shut down
businesses, leading to increase in unemployment and decrease in aggregate demand.
• Further due to uncertainty and economic disruptions caused by pandemic lead to
decrease in business investments. Companies postpone or cancel their capital
expenditures, expansion plans, and research and development activities. This reduction
in investment further dampens economic activity, as it affects sectors like manufacturing,
construction, and technology.

Write your answer for Part C here.

Aggregate demand refers to the total demand for goods and services in an economy. Aggregate
supply refers to the total supply of goods and services produced in an economy.

Aggregate Demand:

• Unemployment and recession would lead to reduction in consumer income and job
insecurity, instigate consumers to cut back on optional spendings. This decline in
consumer confidence and purchasing power reduces the aggregate demand. Because of
the pandemic, businesses postpone and withdraw their investment plans due to weak
market conditions and uncertain economic outlook, which further decline the business
investment and reduce the aggregate demand.

Aggregate Supply:

• Supply chain adversely affected in India during the recession, especially when there is
disruption in the availability of raw materials, transportations, and imports. This leads
to production constraints and limit the ability of businesses to meet the demand, which
further reduce the aggregate supply. Unemployment and recession would also lead to
reduction in production levels as businesses face lower demand for goods and services.
This decline in production is often accompanied by layoffs, reduced work hours, and
underutilization of resources, resulting in a decrease in aggregate supply. Labor
productivity would also decline due to high unemployment rates. Workers who lose their
jobs face difficulties in finding new employment, leading to skills depreciation and
reduced output per worker, thereby affecting aggregate supply.

The combination of reduce aggregate demand and supply create a downward twist in the
economy. Decrease in aggregate demand leads to lower production levels, which in turn results
in businesses cutting back on jobs or laying off workers, which further increase unemployment.
High unemployment would cause reduction in the household income and purchasing power,
leading to further decrease in aggregate demand. The decline in aggregate demand and
aggregate supply reinforces each other, intensifying the recession pressure on the economy.
Write your answer for Part D here.

AD-AS model helps in understanding the relationship between aggregate demand and aggregate
supply. it shows how spending in an economy (AD) relates to production in an economy (AS)
and thus, helps in determine the macroeconomic equilibrium, which indicates the real GDP and
price levels. During unemployment and recession, the AD/AS (Aggregate Demand/Aggregate
Supply) curves exhibit specific behaviors that reflect the economic conditions.

Aggregate Demand Curve:

• Unemployment and recession lead to decrease in consumer spending, and investments

as a result the AD curve shifts leftward from AD0 to AD1, indicating a lower level of
aggregate demand at each price level. This shift reflects the reduced overall demand of
goods and services in the economy. The leftward shift of the AD curve also implies a
lower equilibrium level of output from Y1 to Y0, this lower equilibrium output indicates
that’s the actual level of production in the economy falls below its potential GDP at E1,
resulting a recessionary gap.
Aggregate Supply Curve:

• Relatively low unemployment for an economy would occurs when the level of output
would be close to potential GDP, at the equilibrium level E0 between AD and SRAS0. 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, there the curve moves from SRAS0
to SRAS1, and the price level will set at a higher price level from P0 to P1. In the AD-AS
graph, cynical unemployment is showing by how close the economy is to the potential or
full employment level of GDP.
 • There would be significant drop in GDP, when the demand curve shifts up and to the left
from AD to AD”. The impact of prices would depend on how these shocks will move in
relation to each other. In this case the supply and demand both fall, and both shifting
from AS to AS” and AD to AD” respectively. We could have a potential situation where
equilibrium price will end up settling at the same level as before the pandemic, where
the GDP would decrease. The change in price would be unclear as it will be dependent
on the exact amount of decrease, they have, the price fluctuation would be indeterminant
in this case as it would be subjective.

Question 4

Write your answer for Part A here.

The Indian government should adopt an expansionary fiscal policy after COVID-19 crisis,
which involves measures to increase the aggregate demand in the economy through various
policy measures, also during the recession the fiscal policy which has higher multiplier effect
and shift demand curve to the right should be adopted.

Policy measure to be undertaken: On May 12, 2020, the Govt of India announced a relief
package of around 10 percent of GDP, including previously announced monetary and fiscal
measures with an aim to encourage business and attract investments.
a) Above-the-line measures which include government direct spending and foregone or
deferred revenues:
• Above-the-line expenditure measures focused primarily on social protection and
healthcare. These include in-kind (food; cooking gas) and cash transfers to lower-
income households wage support and employment provision to low-wage workers;
insurance coverage for workers in the healthcare sector; and healthcare
infrastructure). The direct money transfer and offer free food and cooking gas by
the govt will help people to saved money on food and cooking gas and received
additional financial aid from the govt, as people have surplus amount in saving,
they are encouraged to spend more, which will boost the economic activity through
multiplier effect.
• The measures that were announced later include additional public investment and
support schemes targeting certain sectors. The latter includes a Production Linked
Incentive scheme targeting 13 priority sectors and a higher fertilizer subsidy
allocation benefiting the agriculture sector, which will to reduce farmers overall
crop cost and they will have more money in hand to support livelihood thus boost
in economic activity. Direct spending in large infrastructure projects will generate
employment and help the economy to grow.
• Govt also provide extension of income tax filing deadline by 3 months; reduction
of penalty for late payments; date for filing fiscal year 18/19 GST tax liability
extended for 3 months; other miscellaneous relaxation of tax regulatory/
administrative requirements. Reduction in up-front tax deductions for workers.
These measures aim to provide relief and flexibility to taxpayers, encourage
compliance, and potentially stimulate economic activity.
b) Below-the-line measures designed to support businesses and shore up credit provision
to several sectors (about 5.3 percent of GDP).
• Measures without an immediate direct bearing on the government's deficit
position aim to provide credit support to businesses, poor households, especially
migrants and, distressed electricity distribution companies, and targeted
support for the agricultural sector, as well as some miscellaneous support
measures. These measures aim to provide targeted support to different segments
 of the economy and society. The government's intention is to mitigate the adverse
effects of economic challenges and promote inclusive and sustainable economic
growth.
• Key elements of the business-support package are various financial sector
measures for micro, small, and medium-sized enterprises (MSMEs), and non-
bank financial companies (NBFCs), whereas additional support to farmers will
mainly be in the form of providing concessional credit to farmers, as well as a
credit facility for street vendors. Overall, the govt aim to strengthen the
respective sectors, promote stability, and contribute to the overall economic
well-being of the country.

Write your answer for Part B here.

The Indian government should adopt expansionary monetary policy, which is also known as
dove monetary policy. During slowdown or a recession, an expansionary policy grows economic
activity, by lowering interest rates for consumers through various measures that make money-
saving relatively unfavorable and promotes spending in the market.

Policy measures to be undertaken: Regulating money supply and interest rates:

• The Reserve Bank of India (RBI) reduced the repo and reverse repo rates by 115
and 155 basis points (bps) to 4.0 and 3.35 percent, respectively. Through interest
 rate management, the RBI has adjusted key policy rates to influence borrowing
costs and stimulate economic activity. Lowering interest rates can encourage
borrowing and investment thus, help to boost GDP. With the help of lower
interest rate the cost of borrowing and lending for banks will fall as the repo rate
reduce, encouraging people to borrowing and discouraging them to deposit, thus
it will increase the money supply in the economy, now more people will be able
to afford the loans and increase their spending which will further boost economic
activity.
• They announced liquidity measures across three measures comprising Long
Term Repo Operations (LTROs), a cash reserve ratio (CRR) cut of 100 bps, and
an increase in marginal standing facility (MSF) to 3 percent of the Statutory
Liquidity Ratio (SLR) and open market operations (including simultaneous
purchases and sales of government securities), with the help of LTRO the RBI
aimed to ensure sufficient liquidity in the banking system. This measure helped
ease liquidity pressures and maintain the flow of credit to businesses and
individuals during the crisis. As RBI cut the CRR rates banks are required to
hold a smaller portion of their deposits as reserves with the central bank, this
aimed to boost credit availability and stimulate economic activity by
encouraging banks to extend loans to businesses and individuals. The increase
in the MSF and the conduct of OMOs, including simultaneous purchases and
sales of government securities, were additional measures to provide liquidity
support to banks. By increasing availability of funds through the MSF and
conducting OMOs, the RBI aimed to address any immediate liquidity shortages
and stabilize the financial markets.
• The RBI introduced regulatory measures to promote credit flows to the retail
sector and micro, small, and medium enterprises (MSMEs) and provided
regulatory forbearance on asset classification of loans to MSMEs and real estate
developers. The RBI aims to stimulate lending to these sectors, which are crucial
for economic growth, employment generation, and entrepreneurship.
• Temporary reduction of Liquidity Coverage Ratio (LCR) and dividend payout
restrictions, allows banks to have more flexibility in managing their liquidity
 positions and strengthens their ability to support credit growth. By retaining
liquidity within the banking system, these measures help ensure the stability and
resilience of the financial sector.

These regulatory measures aim to address the challenges faced by specific sectors, promote
credit flows, enhance liquidity, and provide temporary relief to borrowers and financial
institutions. They support the availability of credit, financial stability, and the resilience of the
banking system in challenging economic conditions.

* Source: WTI vs. Brent oil prices: When and why do they diverge? | FRED Blog
(stlouisfed.org)