Name Anirudha Chakraborty

Question 1

The COVID-19 pandemic caused significant demand shocks worldwide, particularly resulting
in reduced demand for commodities. The early 2020 shutdown in China had a profound impact
on the demand for fossil fuels, leading to a steep drop in prices. To prevent further price declines
and stimulate an increase in oil prices, OPEC made the strategic decision to curtail supply,
aiming to maximize profitability and maintain previous profit levels.

Before the COVID-19 pandemic, the demand for oil displayed limited responsiveness to price
fluctuations. Daily activities such as operating factories, commuting to work, shopping, and
socializing continued irrespective of gasoline prices. However, the pandemic ushered in a series
of changes, including factory closures, the transition to remote work, reduced social interactions,
restrictions on dining out, vacation cancellations, and a decrease in commercial flights.
Consequently, the demand for fuels dropped, causing a leftward shift in the demand curve.

If the supply curve remained constant, the new demand curve intersected with the old supply
curve at a lower point, resulting in a lower equilibrium. To counteract this and raise prices, the
approach taken was to reduce the supply, shifting the supply curve to the left and cutting across
the new demand curve at a different point. Consequently, the new equilibrium was situated to
the left of the old one but at the same price level. Following the decrease in demand and
subsequent supply reduction, the new equilibrium price matched the old one. However, this new
equilibrium meant that a smaller quantity of oil would be purchased at a higher price, allowing
for the retention of profits.

OPEC is a prime example of an oligopoly market structure, as it comprises a consortium of oil

producers collaborating to manipulate pricing and supply to increase their market share and
maximize profits.
OPEC can be characterized as representing an oligopoly market structure, given that it consists
of a consortium of oil producers collaborating to manipulate prices and control the supply to
secure market share and maximize profits.

Key characteristics of an oligopoly market include:

1. A limited number of sellers producing essentially the same product.

2. Typically, there are only two or three major sellers dominating the market.

3. Sellers in an oligopoly have substantial bargaining power, enabling them to influence market
conditions.

So, OPEC aligns with these features of an oligopoly market structure, as it comprises a select
group of oil-producing entities coordinating their actions in the global oil market.

The business was producing 92 articles per month.

 The total profit is €2500

 We would hire 8 journalists

Profit is maximized when the marginal cost of a quantity equals the marginal revenue earned by
that quantity. At 92 articles, the marginal cost is €375 and the marginal revenue is €375.

Question 2

On 9 March 2020, Italy went into lockdown. As a result, you had to shut down your office and
adopt a work-from-home policy. This eliminated your fixed costs of €8,000. At the same time,
your ad revenue per article fell to €250. This was because all companies suddenly reduced their
advertising spending.

 I have to fire 4 journalists and keep 4 in order to maximize the profit.

 The new total profit is €1500
  As the ad revenue fell to €250 per article, the marginal cost should equal the marginal
revenue which is €250.

Question 3

This type of unemployment is known as cyclical unemployment, which occurs when businesses
cease operations due to a lack of demand for their products or services. When the demand for a
particular product or service decreases, companies often reduce their production to match the
lower demand. As production levels decrease, fewer employees are needed to maintain the
reduced level of output. Consequently, those workers who are no longer necessary are let go by
the company and consequently become unemployed.

This is an instance of a demand-driven recession. The measures put in place to curb the spread
of Coronavirus Disease 2019 (Covid-19), particularly social distancing and lockdowns, have
prompted the postponement of nonessential spending. Additionally, the Covid-19 pandemic has
resulted in a significant and tragic loss of human lives in India. As a consequence of these
factors, the aggregate demand is undergoing a substantial decline.

In India, as a result of the aforementioned phenomenon, both aggregate demand and aggregate
supply shifted to the left.

The shift in Aggregate Demand to the left occurred due to the decline in consumer spending and
reduced willingness to invest, causing a fall in aggregate demand. When the demand curve shifts
to the left while supply remains constant, the prices of goods tend to decrease.

On the other hand, the shift in Aggregate Supply to the left was a consequence of the lockdown
measures. During this period, while demand significantly decreased, the supply remained
largely unchanged for a period, creating a surplus in the market. This surplus in goods available
in the market led to a leftward shift in the Aggregate Supply curve.
 In this scenario, the Aggregate Demand curve will indeed shift to the left due to the decrease in
demand caused by various factors.

As for the Aggregate Supply curve, it initially shifts to the left due to the surplus in the market
resulting from the lockdown measures. However, it's important to note that over time, as the
market conditions and demand patterns adjust, the Aggregate Supply curve may shift back
towards the right. This adjustment can occur as supply adapts to meet changing levels of demand
and investment. So, while there is an initial leftward shift in Aggregate Supply, it's possible for
it to move back to the right as the economy and market conditions evolve.

Question 4

In the aftermath of the pandemic-induced crisis, the Indian government should consider
implementing various macroeconomic steps, including expansionary fiscal policies. These
policies could include:

1. Government Expenditure:- Introduction of relief programs: Implementing programs to

provide unemployment compensation to daily wage workers and farmers who were severely
affected by the lockdown.

Free travel for migrants without employment:- Offering support to migrants who lost their
jobs by providing free or subsidized travel options to help them return to their hometowns or
seek employment elsewhere.

Controlling basic medical charges:- Implementing measures to regulate and control healthcare
costs, ensuring that essential medical services are affordable for all.- Providing minimum
healthcare facilities to the impoverished: Expanding access to basic healthcare services for
disadvantaged populations, ensuring that everyone has access to essential medical care.
2. Taxation:- Lowering taxes: Reducing tax rates, especially for individuals and businesses, can
stimulate economic activity by putting more money into the hands of consumers. This approach
has been widely used by democratic countries during times of crises and economic downturns
to boost spending and investment.

These expansionary fiscal policies aim to address the immediate economic challenges and
hardships caused by the pandemic. By providing financial relief, improving access to essential
services, and boosting consumer spending, the government can contribute to the economic
recovery and stability in India.

In response to the economic crisis brought about by the pandemic, the Reserve Bank of India
(RBI) can consider implementing various macroeconomic steps, particularly through monetary
policies. These steps may include:

1. Open Market Operations (OMO):- Purchase of government bonds: The RBI can inject
money into the economy by purchasing government bonds. This action increases the money
supply, providing consumers with more funds to spend and stimulating demand.

2. Interest Rate Reduction:- Lowering interest rates: Reducing interest rates on borrowings
can encourage consumers to take out loans for various purposes, including spending, investing,
and businesses. This, in turn, increases demand and the circulation of money in the market.

3. Loan Relief Measures:- Providing relief for farmers and daily wage workers: The RBI can
work in coordination with financial institutions to offer loan relief to these groups. This relief
may involve extending loan repayment periods or reducing the interest burden on their loans.

4. Supporting Small Businesses:- Delayed loan repayments for small businesses: The central
bank can work with financial institutions to facilitate delayed loan repayments for small
businesses. This measure can help businesses weather the economic challenges and continue
their operations.
5. Facilitating Credit Availability:- Ensuring adequate credit availability: The RBI can
encourage banks to ensure the availability of credit, especially for small and medium-sized
enterprises (SMEs), to support their growth and expansion.

These monetary policies aim to boost liquidity, lower borrowing costs, and ease the financial
burden on various segments of the population, including small businesses, farmers, and daily
wage workers. By implementing these measures, the RBI can contribute to economic recovery
and stability in India following the pandemic crisis.