Name Shailesh Gokhale

Question 1

A.

The Market is an oligopoly-type market & the joint decision-making phenomenon is called
Collusion and acts as a single firm. Collusion takes place when firms / Market comes together
to make the decision that impact/influence Price and output.

When a few players in the oligopoly market come together to influence the output and the
price of the product through joint decision-making, it is called Collusion. A group of firms that
have colluded is termed a Cartel. Collusion is a way for firms to make higher profits at the
expense of consumers and reduces the competitiveness of the market. When firms collude,
they act as a monopoly and enjoy the perks that come along with it. OPEC is a formal type of
Collusion.

The advantages of Collusion and Cartels:

• Increasing the joint profits

• To lower competition, marketing, and advertising costs
• To reduce uncertainty regarding price and output since the decisions are taken
collectively.
• Collusion restricts competition so the players are able to enjoy monopoly power.
• Additional profit from collusion can be leveraged to invest in Research and
development for Productivity OR yield improvement that can help again to push Mfg
cost/Operating cost down.
The disadvantages of Collusion and Cartels:

• Collusions lead to the creation of a monopoly. Such monopolies adversely affect the
interest of the consumers by resorting to restricting output and creating artificial.
• Industry gets the disadvantages of monopoly (higher price) but none of the advantages
(e.g. economies of scale)
• High prices for consumers. This leads to a decline in consumer surplus and allocative
inefficiency (Price pushed up above marginal cost)
• New firms can be discouraged from entering the market by types of collusion which act
as a barrier to entry. (This can be an advantage also if the intentionally wants to avoid
new player entry)
• Easy profits from collusion can make firms lazy and avoid innovation and efforts to
increase productivity.

Write your answer for Part B here.

OPEC was facing multiple challenges at that time;

• Lack /shortage of storage space

• Oil Prices were falling

Graph-1

Due to lockdown and restrictions on many, Air travel was on halt, and consumption of
petroleum products was reduced. The supply was constant but demand has been shrunk, the
resultant was a decrease in price (Graph-1). The economy of most of OPEC countries is depend
upon oil prices and if these prices reduce, it’s impacts their profit margin and ultimately their
growth. Hence to counter further price fall OPEC decided to control the supply. When OPEC
met and decided to reduce down the supply this impacted as follows (Refer to graph-2)

Graph-2

As supply reduced and the demand was in line with supply and that give appropriate results
in an increase in prices.

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?

OPEC operates in an oligopoly with a competitive fringe market structure and Its cartel is a
type of oligopoly..

The Key Features of the Oligopoly Market are as below:

• There are Few large firms in the Market and they dominate the Market
• A Product can be identical, like telecom, Oil Mfg., cement, steel OR differentiated like
Pizza Chain, automobiles
• The Entry into this industry is restricted because of the existence of big players in that
market.
• Firms under oligopoly are interdependent with each other. The actions of one firm
affect the actions of other firms. A firm considers the action and reaction of the rival
firms while determining its price and output levels. A change in output or price by one
firm evokes reactions from other firms operating in the market.
• Non-Price Competition: Under oligopoly, firms are in a position to influence the prices.
However, they try to avoid price competition for the fear of a price war. They follow
the policy of price rigidity. Price rigidity refers to a situation in which price tends to stay
fixed irrespective of changes in demand and supply conditions.
If a firm tries to reduce the price, rivals will also react by reducing the prices. However,
if it tries to raise the price, other firms might not do so. It will lead to a loss of customers
for the firm, which intended to raise the price. So, firms prefer non-price competition
instead of price competition.
• Group Behavior: Under oligopoly, there is perfect interdependence among different
firms. The price and output decisions of a particular firm directly influence the
competing firms. Instead of an independent price and output strategy, oligopoly firms
prefer group decisions that will protect the interest of all the firms. Group Behaviour
means that firms tend to behave as if they were a single firm even though individually,
they retain their independence.
• Indeterminate Demand Curve: Under oligopoly, the exact behaviour pattern of a
producer cannot be determined with certainty. So, the demand curve faced by an
oligopolist is indeterminate (uncertain). As firms are interdependent, a firm cannot
ignore the reaction of the rival firms. Any lowering in price by one firm may lead to a
change in prices by the competing firms. So, the demand curve keeps on shifting and it
is not definite, rather it is indeterminate.
Question 2

A.

Fixed Total
Cost Variabl Cost
No. of Article per e Cost per Total Averag Margina Total
Journalist s per Mont per Mont Revenu Profit e Total Margina l Profi
s Month h Month h e / Loss Cost l Cost Revenue t
-
1 15 8000 3000 11000 5625 -5375 733.33 5375
-
2 29 8000 6000 14000 10875 -3125 482.76 214.29 375 3125
-
3 42 8000 9000 17000 15750 -1250 404.76 230.77 375 1250
4 54 8000 12000 20000 20250 250 370.37 250.00 375 250
5 65 8000 15000 23000 24375 1375 353.85 272.73 375 1375
6 75 8000 18000 26000 28125 2125 346.67 300.00 375 2125
7 84 8000 21000 29000 31500 2500 345.24 333.33 375 2500
Profit Max;
8 92 8000 24000 32000 34500 2500 347.83 375.00 375 2500 MR=MC
9 99 8000 27000 35000 37125 2125 353.54 428.57 375 2125
10 105 8000 30000 38000 39375 1375 361.90 500.00 375 1375

Chart Title
600
500
375 375 375 375 375 375 375 375 375
500
400
429
300 375
333
200 300
250 273
214 231
100
84 92 99 105
0 54 65 75
29 42
15
1 2 3 4 5 6 7 8 9 10

Articles per Month Marginal Cost Marginal Revenue

We work on the Profit maximization method; the profit maximization happens when
Marginal Cost (MC) = Marginal Revenue (MR). In this case, Marginal cost matches with
Marginal revenue @ 8 reporter count and @ 92 articles.

Total articles =92 @ 8 reporters and the Profit is 2500€

Write your answer for Part B here. B:

Fixed Total
Articles Cost Variable Cost Profit Average
No. of per per Cost per per Total / Total Marginal Marginal Total
Journalists Month Month Month Month Revenue Loss Cost Cost Revenue Profit
1 15 0 3000 3000 3750 750 200.00 750
2 29 0 6000 6000 7250 1250 206.90 214.29 250 1250
3 42 0 9000 9000 10500 1500 214.29 230.77 250 1500
Profit
Max;
4 54 0 12000 12000 13500 1500 222.22 250.00 250 1500 MR=MC
5 65 0 15000 15000 16250 1250 230.77 272.73 250 1250
6 75 0 18000 18000 18750 750 240.00 300.00 250 750
7 84 0 21000 21000 21000 0 250.00 333.33 250 0
- -
8 92 0 24000 24000 23000 1000 260.87 375.00 250 1000
- -
9 99 0 27000 27000 24750 2250 272.73 428.57 250 2250
- -
10 105 0 30000 30000 26250 3750 285.71 500.00 250 3750

Chart Title
600 500.00
500 428.57
375.00
400 333.33
272.73300.00
250.00
300 214.29230.77
200
250 250 250 250 250 250 250 250 250
100
0 75 84 92 99 105
42 54 65
15
1 29
2 3 4 5 6 7 8 9 10

Articles per Month Marginal Cost Marginal Revenue

As we are considering only profit maximization; the Profit maximization is happening with 4
journalists; which means we required to fire

Earlier Profit maximization level – Current Profit Maximization

=8-4

=4 Journalist to fire.

The total new profit is 1500€

The new Profit maximization is happening with 4 journalists against 8 for earlier hence to
maintain firm profitability and sustainability required to fire 4 journalists. Additional these 4
journalists only add to the cost (MC>MR) without contributing additional profit hence fired.
Question 3

Write your answer for Part A here.

A.

During the Pandemic, India has encountered a Cyclical type of unemployment. During the
pandemic, initially, it was a supply-led recession for a few months but has been transformed
into Demand led recession. Cyclical unemployment takes place when the demand in an
economy begins to decrease and the same situation happens during a Pandemic. This would
happen due to the aggregate demand in the Indian economy had been decreased. The
consumer spent conservatively and start saving for the future. As demand decreased,
required lesser people/supply to cater to that demand/need. As a result, the economy
doesn’t have enough jobs in the market. Due to Time GAP OR Delay between people losing
their jobs and getting new jobs, the situation turns into cyclical unemployment.

In this scenario, The Indian economy was slowing down OR entering a recession, and the
firms/business wish to hire low-cost employees and also Fewer in quantity. In this case labor
demand curve shifts towards left

Write your answer for Part B here.

During the pandemic, the Initially was a supply-led recession for a few months has been
transformed into Demand Led recession OR Demand shock recession.

Initially, due to various countries adopting Lockdown and stopping travel and vehicle
movement from one city to another, airlines stopped traveling from country to country, and
the supply of goods get disturbed for more than two months. The laborers were away from
work for more than 3-4 months, which triggered a supply shock in the supply chain for a few
months. As we progress and the lockdown continues, the demand also reduced as no one
was moving out of the house and thus converted into a demand-led recession.

This initial supply shock and later Demand shock, subsequently turn into a loss of income,
which causes a further decrement in consumption resulting in further loss in output.

The supply-led recession is triggered as labor stays away from Work Place and at the same
time, aggregate demand is also lowered, decreasing the level of output.

The recession was a negative supply shock and negative Demand shock, which were
responsible for one another. Initial supply shock, import falls, Demand shock, and Export
falls.

The demand shock was resultant of Lockdown, measures which have resulted in a situation
like Air Travel shut down. During the Pandemic due to lockdown, many consumers were
prevented from going to stores/ outlets, and thus demand disappeared from the market. Due
to uncertainty people started less spending and trying to save for the future. People also
started spending only on essentials (Food and shelter) rather than non-essentials (Luxury
items), thus slowing the demand for items goes down and turning into a demand-led
recession.

Write your answer for Part C here.

C.

The effect of cyclical unemployment and recession on aggregate demand and aggregate
supply, The aggregate supply would fall as labor/employees stayed away from work due to
restrictions on mobility OR unemployment resultant the demand would fall short as the
lockdown period is extended and people would have lower consumption.

If there is a recession and therefore an increase in unemployment aligned with a decrease in

output. If AD= AS then GDP will fall substantially fall below expected / Potential GDP. The
price level is also falling and in the short run the aggregate demand also comes down causing
a negative supply shock. If People take the wait approach to the resumption of day-to-day
jobs, an & increase in prices of Raw material Packaging material required to Mfg the goods
would result in aggregate supply going down.

Due to the measures adopted to prevent the spread of the Covid-19, especially social
distancing and lockdown, non-essential expenditures are being postponed. This is causing
aggregate demand to reduce OR shrink. In addition to the demand reduction, there will also
be widespread supply chain disruptions, as some people stay home, few travel back to their
hometown/villages, imports are disrupted, and foreign travel is stopped. This will negatively
affect production in almost all industries.

Initially, the shock hit the service sector, especially travel, tourism, and hospitality but
gradually the shock will spread to manufacturing, mining, agriculture, public administration,
and construction – all sectors of the economy. The peoples are important and all the jobs
can’t be executed by remote access specially Mfg, mining, and Agri type of operations. This
further will adversely affect investment, employment, income, and consumption, pulling
down the aggregate growth rate of the economy.

D:

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

During the Cyclical unemployment, The AD and AS curves behave in the following manner.
The aggregate supply curve shifts to the right as productivity increases or the price of key
inputs falls, making a combination of lower inflation, higher output, and lower
unemployment possible.
An increase in aggregate supply due to a decrease in input prices is represented by a shift to
the right of the SAS curve. A second factor that causes the aggregate supply curve to shift is
economic growth. Positive economic growth results from an increase in productive resources,
such as labor and capital.
The aggregate demand curve tends to shift to the left when total consumer spending declines.
Consumers might spend less because the cost of living is rising or because government taxes
have increased. Consumers may decide to spend less and save more if they expect prices to
rise in the future.
When AD increases, inflation increases, and the unemployment rate decreases. A movement
from point A to point C represents a decrease in AD. When AD decreases, inflation decreases,
and the unemployment rate increases.
Aggregate Demand and Supply Shift Left. Recessions can be caused by negative shocks to
either aggregate demand or aggregate supply.
A decrease in consumer confidence or business confidence can shift AD to the left, from AD0 to
AD1.
When the economy is in recession, people will buy only essential goods and services at a fixed
price point. Therefore, demand curves for most products will temporarily shift to the
left during a recessionary period. Consumer spending and production generally bounce back
due to pent-up demand, but that is not always the case. It might take more time to bounce
back to the original point.

The shift in aggregate demand, from AD0 to AD1, when it happens in the area of the SRAS
curve that is near potential GDP, will lead to a higher price level and pressure for a higher price
level and inflation. The new equilibrium (E1) is at a higher price level (P1) than the original
equilibrium. (b) A shift in aggregate supply, from SRAS0 to SRAS1, will lead to a lower GDP and
to pressure for a higher price level and inflation. The new equilibrium (E1) is at a higher price
level (P1), while the original equilibrium (E0) is at a lower price level (P0).

An alternative source of inflationary pressures can occur due to a rise in input prices that
affects many or most firms across the economy—perhaps an important input to production
like oil or labor—and causes the aggregate supply curve to shift back to the left. In (b), the SRAS
curve’s shift to the left also increases the price level from P0 at the original equilibrium (E0) to
a higher price level of P1 at the new equilibrium (E1). In effect, the rise in input prices ends up,
after the final output is produced and sold, passing along in the form of a higher price level for
outputs.
Cyclical unemployment is relatively large in the AD/AS, when the equilibrium is substantially
below potential GDP. Cyclical unemployment is small in the AD/AS when the equilibrium is
near potential GDP. The natural rate of unemployment, as determined by the labor market
institutions of the economy, is built into what economists mean by potential GDP, but does
not otherwise appear in an AD/AS diagram. The AD/AS framework shows pressures for
inflation to rise or fall when the movement from one equilibrium to another causes the price
level to rise or to fall. The balance of trade does not appear directly in the AD/AS diagram, but
it appears indirectly in several ways. Increases in exports or declines in imports can cause shifts
in AD. Changes in the price of key imported inputs to production, like oil, can cause shifts in
AS.
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.

The first measure is related to the unorganized sector protection as many workers from this
sector were impacted badly. They have very little savings to address the crises. This will not be
easy to do… Indian GOVT should adopt policy to protect them…

Direct employment Guarantee from Govt. as a stabilizer at the initial stage and it’s not very
easy due to if people need jobs they can just apply. The constraint here is that if social
distancing has to be maintained due to the Covid-19 outbreak and since economic activity will
get stalled, even MNREGA may not be a very viable option. The key, therefore, will be to ensure
that the funding is available to the people, and in the hands of the states and panchayats,
villages, such that when the appropriate time comes and a large number of workers sign up
for MNREGA and they can start getting wages for few days. Another option will be for the
government to give large-scale direct cash transfers using the Jan Dhan accounts so that
people have money to spend and survive. This is to start helping the informal sector cope with
the shock.

For the organized sector, which is comparatively less impacted, allow them a subsidy for loan
repayment in terms to make the banks somewhat less risk-averse in their overall lending. Offer
additional capital to public sector banks, to give them a larger cushion to fall back on in case
they make lending mistakes given the prevalent uncertainty. Govt. would offer GST refund to
the private sector to improve corporate cash flows and delaying payments of corporate taxes.

Medium, small and micro enterprises (MSMEs), pay arrears to the MSMEs, this to an
immediate infusion of cash, and encourage banks to continue to finance them.
Govt also can offer Interest subsidies could also be given to banks, to allow them to reduce the
cost of credit for MSME loans. Also can would offer help in loan guarantee fund set up.

The Govt offered 20L Cr help in which announced… 20 lakh crore rupees have been injected
into the Indian economy to enable it to recover from the external shock of the Covid-19 crisis.
Measures have been taken to boost employment, stabilize business investments and
encourage a self-reliant economy.

• Injection of an additional Rs.40,000 crore to MGNREGA. This to boost rural employment

and is hailed as an important step toward the absorption of rural migrant labor that has
returned from urban areas owing to the nationwide lockdown.
• Rs.15,000 crores have been committed for health-related measures for containment of
Covid-19.
• Borrowing limits of the states have been increased from 3 to 5 percent of gross state
domestic product (GSDP).
• Structural reforms to be introduced in eight sectors: Coal, Mineral, Defense, Airports
and airspace, Maintenance: Repairs and operations (MRO), power sector, social
infrastructure projects, space and atomic energy.
• Upgradation of farm infrastructure (cold chains & harvest storage), animal husbandry
(Rs. 5000 crore infusion to dairy farmers) and fishery (development of marine and in-
land fisheries)
• Collateral free automatic loans for businesses and MSMEs and Rs.30,000 crore liquidity
has been injected into NBFCs.
• Rs 3 lakh crore collateral-free loans for MSMEs having a 4-year tenure and moratorium
of 12 months. These loans will be available till October 31, 2020 and will be 100 per
cent credit guaranteed. This will help 45 Lakh units to resume activity and safeguard
jobs.
• Free food grains to be distributed to migrant labour for two months and affordable
rental housing complex to be provided for Migrant workers or urban poor. Street
 vendors to be provided credit facility and Rs. 6000 crore employment boost using
CAMPA Funds (Compensatory Afforestation Fund Management and Planning
Authority)
• Rs.90,000 crore financial support to power discom MSMEs

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.

The Reserve Bank should adopt the following to handle the situation in an effective manner:

• Easing liquidity
• Repo – Rate cut
• Relaxation in NPA norms
• RBI Reserve utilization

Liquidity Management:

• Targeted Long-Term Repo Operations (TLTROs): RBI will conduct auctions of targeted
term repos of about INR 1 lakh cr for fresh deployment in investment-grade corporate
bonds, commercial paper non-convertible debentures
• Cash Reserve Ratio: As a one-time measure, RBI has reduced the cash reserve ratio of
all banks by 100 basis points to 3% of Net Demand and Time Liabilities (NDTL) which
will result in liquidity enhancement of about 1.37 Cr.
• Marginal Standing Facility: The limit of the banks for borrowing overnight has been
increased from 2% to 3% into the Statutory Liquidity Ratio (SLR). This will allow
additional liquidity of INR 1.37 lakh cr.
REGULATION AND SUPERVISION:

Moratorium on Term Loans: RBI has permitted all lending institutions to allow a moratorium
of three months (later extended to six months) on payment of installments in respect of all
term loans outstanding as on March 1, 2020. These institutions include:
• Commercial banks like regional rural banks, small finance banks and local area banks
• Co-operative banks and all-India Financial Institutions
• NBFCs like housing finance companies and micro-finance institutions

India’s financial services sector is staring at RBI for more relief, including a 90 Days deferment
in NPA classification Norms. Due to lockdown and other restrictions, there is a high possibility
that industries like Travel, Tourism, Food & restaurants, hotels, and the Airline industry may
default their loan and add to the deterioration in assets. This help not to pay for 90 days else
without this help these industries may come under pressure of reducing the cost of survival
and resulting in Job cut and unemployment. This relaxation helps to avoid at least in certain %.

Deferment of Interest on Working Capital Facilities: RBI also permitted all lending institutions
to allow a deferment of three months on payment of interest in respect of working capital
facilities sanctioned in the form of cash credit/overdraft of all such facilities outstanding as on
March 1, 2020.
Easing of Working Capital Financing: All lending institutions are permitted by RBI to recalculate
drawing power by reducing margins and/ or by reassessing the working capital cycle for the
borrowers in respect of working capital facilities sanctioned in the form of cash
credit/overdraft.
Support to Real Estate Sector: RBI has permitted an additional time of one year for the
extension of the date for commencement of commercial operations (DCCO) in respect of all
loans provided by NBFCs to the real estate sector.
DECISIONS IN RESPECT OF FINANCIAL MARKETS:

In recent times, RBI should recognize the growth of the offshore Indian Rupee (INR)
derivative market - the Non-Deliverable Forward (NDF) market and decided to remove
segmentation between the onshore and offshore markets
RBI should allow banks in India to participate in the NDF market from 1st June 2020 through
their branches in India, their foreign branches, or through their International Financial
Services Centre (IFSC) Banking Units (IBUs)