Name Anurag Bose

Question 1

Write your answer for Part A here.

Name and describe the phenomenon which involves such joint decision-making. What
are its advantages and disadvantages? (2+2 marks)

The phenomenon involving joint decision-making by the Organization of Petroleum Exporting

Countries (OPEC) to reduce oil supply is known as "collusion". Collusion refers to a
cooperative agreement among competing firms or producers to coordinate their actions in
order to manipulate market outcomes in their favor.

Advantages:

Price Stability: By collectively reducing oil supply, OPEC can stabilize oil prices in the
market, preventing extreme fluctuations that can harm both producers and consumers.

Market Control: OPEC's coordinated actions allow its member countries to exert significant
influence over global oil prices and market dynamics, giving them a degree of control over
their economic fortunes.

Disadvantages:

Reduced Competition: Collusion within OPEC reduces competition among member

countries, potentially leading to higher prices for consumers and limiting market access for
non-member oil producers.

Economic Impact: While OPEC's actions can benefit its member countries economically by
boosting oil prices, they can also harm oil-importing nations and industries reliant on
affordable energy, leading to economic strain and inflationary pressures.
Write your answer for Part B here.

What made OPEC decide to cut the supply of oil? What was the desired outcome of the
decision? What was the change in the supply and demand curves of oil and the
subsequent market equilibria? Analyze the changes both before and after the decision to
reduce supply. (1 + 1 + 3 marks)

OPEC decided to cut oil supply due to the sharp drop in global demand caused by the COVID-
19 pandemic. The pandemic led to widespread lockdowns, travel restrictions, and economic
slowdowns, which dramatically reduced the demand for oil as transportation and industrial
activities decreased.
The desired outcome of OPEC's decision to cut oil supply was to stabilize oil prices and
prevent a further collapse in prices due to oversupply. By reducing production, OPEC aimed to
counterbalance the sharp decline in demand and prevent a prolonged period of low oil prices,
which could have had severe economic implications for oil-producing countries.

Change in Demand and Supply Curve before the decision:

The sudden and substantial decrease in oil demand would cause the demand curve to shift
notably to the left (D2), indicating that people are willing to buy less oil at any given price.
However, since the decision to reduce oil supply had not been made at this point, the supply
curve would remain the same. the market equilibrium point would shift to a new position due
to the changes in supply and demand. With the demand curve shifting to the left and the
supply curve remaining unchanged, the new equilibrium point would reflect a lower quantity
(E2) of oil being traded at a lower price. As a result, prices would drop, and the market would
be left with an excess supply of oil, as illustrated in the graph.
Change in Demand and Supply Curve after the decision:
After the decision to reduce supply, the oil price would slightly increase, but not to pre-
pandemic levels. The supply curve would shift (S1), leading to a higher equilibrium price.
Additionally, there would be a slight rightward shift in the demand curve (D1) towards the end
of the year, further influencing market dynamics.
Write your answer for Part C here.

What market structure does the OPEC operate in? What are the key features of such a
market structure? (1 + 3 marks)

OPEC operates in an oligopoly market structure. Key features of such type of market
structure are:

 Limited Firms: Oligopoly markets feature a small number of firms, each wielding
substantial market influence, such as the Indian automobile industry.
 Non-Price Competition: Firms avoid price wars by engaging in non-price
competition, like advertising and after-sales services, instead of directly adjusting
prices.
 Interdependence: Actions of one firm significantly impact others, shaping decisions
on pricing and production. For instance, changes in Maruti's pricing prompt responses
from rivals like Tata and Hyundai.
 Entry Barriers: High capital requirements and other obstacles restrict new firms from
entering, ensuring limited competition and potential for long-term profits.
 Selling Costs: Firms heavily invest in advertising and marketing to differentiate their
products and attract customers, crucial in the competitive environment.
 Product Nature: Oligopolies may produce either homogeneous or differentiated
products, affecting market dynamics and competition intensity.
 Group Behavior: To prevent price conflicts, firms often make collective pricing
decisions, reflecting their interdependent nature and desire for mutual benefit.

Question 2

Write your answer for Part A here.

How many articles was the business producing? (2 marks)

Ans. Business was producing 92 articles as that is the point of maximum profit

What was the total profit? (1 mark)

Ans. Total profit stands at EUR 2500 i.e. Total Revenue minus the Total Cost (34,500-
32,000)

Explain conceptually how you arrived at the profit maximizing level of output. You don't
need to show exact calculations. (3 marks)

Ans. To reach at profit maximizing output, following steps were taken into account:

 Identify Fixed and Variable cost and add both to get 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 = MR, it
will be the profit maximizing output.

Write your answer for Part B here

How many journalists would you have to fire? Assume that you only care about
maximizing profits. (2 marks)
Ans. As the business aims to maximize profits, it needs to fire 4 journalists. The new profit-
maximizing output level has decreased to 54 articles per month, down from the previous level
of 92 articles. Consequently, this situation results in an excess of four employees.

What is your new total profit? (1 marks)

Ans. Total cost stands at EUR 1500 i.e. Total Revenue minus the Total Cost (13,500- 12,000)

Why did you fire the journalists? Explain your answer conceptually. You don’t need to
show exact calculations. (3 marks)

Ans. To maximize profit, it's crucial to optimize the balance between Marginal Cost (MC) and
Marginal Revenue (MR). The point where MC equals MR indicates the optimal level of
output. Initially, this equilibrium occurred when employing 8 journalists to produce 92
 articles. However, due to changing market conditions, this equilibrium shifted. Now, the
profit-maximizing point is reached with only 4 journalists producing 54 articles. To achieve
this, 4 journalists had to be let go. This adjustment ensures that the cost of producing
additional articles is balanced by the revenue generated from them, maximizing profit.

Question 3

Write your answer for Part A here.

What type of unemployment would a country like India experience from such a
pandemic? Please provide an explanation. (2 marks)

In the context of a pandemic like Covid-19, India would likely experience a cyclical
unemployment.
Cyclical unemployment occurs when there isn't enough aggregate demand in the economy to
provide jobs for everyone who wants to work. During the pandemic, businesses closed
operations due to lockdowns, social distancing measures, or decreased consumer demand,
leading to layoffs and job losses. This type of unemployment is typically temporary and
should decrease as the economy recovers.

Write your answer for Part B here.

What type of recession would be caused by such a pandemic? Provide an explanation. (2

marks)

The Covid-19 pandemic triggered a recession that initially started as a supply shock
recession and subsequently evolved into a demand shock recession.

Governments worldwide imposed restrictions such as lockdowns and social distancing

measures to control the spread of the pandemic. These restrictions caused significant
disruptions in supply chains, leading to a decline in aggregate supply and triggering a supply
shock recession.

As firms experienced reduced profits due to these supply disruptions, they were forced to lay
off workers. This increase in unemployment led to a decrease in purchasing power, which in
turn resulted in a sharp decline in aggregate demand. The mass unemployment and widespread
bankruptcies ultimately transformed the recession into a demand-led recession.

In summary, the pandemic-induced recession began as a supply shock recession due to

disruptions in supply chains caused by government restrictions. However, as firms laid off
workers and aggregate demand fell, the recession transitioned into a demand-led recession.

Write your answer for Part C here.

What would happen to the aggregate demand and aggregate supply in India because of
the above two phenomena? Elaborate your answer. (2 marks)

In India, the pandemic resulted in both aggregate demand and aggregate supply shifting
leftward, reflecting the economic impact of this crisis.

Aggregate demand shifted left i.e. fall in Aggregate demand due to a decrease in consumer
spending and a decline in the willingness to invest. When demand shifts leftward and supply
remains constant, it leads to a fall in the price of goods and services. This reduction in
aggregate demand can be attributed to factors such as job losses, income uncertainty, and
precautionary savings among consumers, as well as reduced investment by businesses due to
economic uncertainty.

Aggregate supply also shifted left i.e. fall in Aggregate supply when the lockdown was
imposed. Initially, the demand experienced a sharp fall, but supply remained constant for some
time. This temporary imbalance created a surplus in the market, leading to a leftward shift in
the aggregate supply curve. The disruption in supply chains, labor shortages, and production
halts contributed to the decrease in aggregate supply.

In summary, the pandemic's impact on the Indian economy resulted to fall in both the
aggregate demand and aggregate supply. The decline in consumer spending and investment
led to a decrease in aggregate demand, while the disruptions in supply chains and production
processes caused a reduction in aggregate supply.

Write your answer for Part D here.

How will the AD/AS curves behave in this situation? Please elaborate your answer. (2
marks)

In this situation, the AD/AS curves will behave as follows:

Shift in Aggregate Demand (AD) Curve: The AD curve will shift leftward due to a
decrease in consumer spending and a decline in the willingness to invest. This shift indicates a
reduction in aggregate demand, which is a result of various factors such as job losses, income
uncertainty, precautionary savings, and reduced investment by businesses due to economic
uncertainty. As the AD curve shifts left, the equilibrium point between aggregate demand and
aggregate supply also shifts, leading to a lower equilibrium level of output (real GDP) and a
lower price level.

Shift in Aggregate Supply (AS) Curve: The AS curve will also shift leftward due to
disruptions in supply chains, labor shortages, and production halts caused by the lockdown.
This shift represents a decrease in aggregate supply, as the economy's ability to produce goods
and services is negatively affected. The leftward shift of the AS curve results in a lower
equilibrium level of output and a higher price level, assuming the AD curve remains constant.

When both curves shift leftward simultaneously, the overall impact on the equilibrium level of
output and price level depends on the relative magnitudes of the shifts. In the context of the
pandemic, both aggregate demand and aggregate supply have decreased. However, the
decrease in aggregate demand might be more pronounced, leading to a significant reduction in
the equilibrium level of output (real GDP)

In summary, the AD/AS curves will both shift leftward in this situation, reflecting the
 negative impact of the pandemic on both aggregate demand and aggregate supply.

Question 4

Write your answer for Part A here.

What type of macroeconomic policy should the Indian government adopt after such a
crisis? Please mention the policy measures to be undertaken clearly with explanations. (3
marks)

After a crisis, the government should adopt expansionary fiscal policies to help overcome the
economic slowdown. These policies can be:

Reduction in Taxation and Interest Rates: Lowering taxation and interest rates encourages
people to borrow more money, increasing the flow of money in the market. This, in turn,
enhances liquidity and helps stabilize the economy.

Increase in Government Expenditure: Boosting government spending injects more money

into the economy, preventing further market decline. This increased spending also supports the
poor, who were severely affected by the pandemic. Many people lost their jobs and struggled
to meet their basic needs, leading to a contraction in the economy. By increasing expenditure,
the government can help uplift these individuals and stimulate economic recovery.

Direct Financial Assistance: It involves providing monetary support directly to individuals

and businesses affected by a crisis like COVID-19. It helps alleviate financial hardships,
sustain consumer spending, prevent business closures, and promote economic stability. This
assistance can take the form of one-time payments, extended unemployment benefits, grants,
loans, or subsidies, and it's crucial for ensuring a swift and targeted response to the crisis.

Write your answer for Part B here.

What type of macroeconomic policy should the Reserve Bank of India adopt after such a
crisis? Please mention the policy measures to be undertaken clearly with explanations. (4
marks)

After a crisis like the COVID-19 pandemic, the Reserve Bank of India (RBI) should adopt
expansionary monetary policies to support economic recovery. Some types of expansionary
monetary policies include:

Cash Reserve Ratio (CRR): The RBI can reduce the CRR, which is the portion of deposits
that banks are required to set aside in cash with the central bank. This will allow banks to have
more funds available for lending.

Statutory Liquidity Ratio (SLR): The RBI can lower the SLR, which is the portion of
deposits that banks are required to set aside in liquid assets such as gold or RBI-approved
securities. This will enable banks to lend more and stimulate economic growth.

Open Market Operations (OMO): The RBI can conduct OMO by buying government
securities in the open market, thereby injecting money into the economy and increasing
liquidity.

Other measures like direct lending to banks, bank reserve requirements, unconventional
emergency lending programs, quantitative easing, and managing market expectations can also
be considered.

To tackle the COVID-19 situation, the RBI can take additional steps to influx money and
reduce interest rates. Lowering interest rates will encourage people to borrow more, increasing
money liquidity and preventing inflation from rising. Banks can also increase the inflow of
money in the market to allow greater transactions while maintaining the equilibrium between
inflation and recession. Some basic policy implementations that can help alleviate the financial
burden on individuals and businesses include:

 No extension of the loan moratorium beyond a specific date.

 Banks can be allowed to restructure stressed corporate and MSME loans.
 Individual borrowers can be given relief at the banks' discretion.
 Borrowing limits against gold can be relaxed.
 The tenure for personal loans can be extended up to two years.