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Question 1 (13 marks)

You learnt that the Organisation of Petroleum Exporting Countries (OPEC) decided to reduce the supply of oil by 9.7 million barrels per day from May 2020. In this context, answer the following questions.

Question 1A: Name and describe the phenomenon which involves such joint decision-making. What are its advantages and disadvantages? (2+2 marks)

Question 1B: 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? Analyse the changes both before and after the decision to reduce supply. (1 + 1 + 3 marks)

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

Question 2 (12 marks)

Suppose you own a small Italian news website. Your team consists of journalists who write news articles on the website. The wage of each journalist is €3000 per month. Your office building and utilities cost €8000 per month. The business earns ad revenue on each article it produces.

From past experience, you know the number of articles you can produce based on the number of journalists you employ.

No. of Journalists No. of articles per month

1 15

2 29

3 42

4 54

5 65

6 75

7 84

8 92

9 99

10 105

You may use the following Excel sheet to help with calculations.

Italian News Website Excel – Attached with email

Question 2A: Assume that the business was operating at the profit maximising level of output before Covid-19. Each article brought in an ad revenue of €375. 

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

What was the total profit? (1 mark)

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

Question 2B: On 9th 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 €8000. At the same time, your ad revenue per article reduced to €250. This was because all companies suddenly reduced their advertising spending.

How many journalists would you have to fire? Assume that you only care about maximising profits. (2 marks)

What is your new total profit? (1 marks)

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

Question 3 (8 marks)

The Covid-19 situation of 2020 has severely affected economies across the globe, including India’s. The Indian economy, too, has been severely affected by this crisis, with different sectors of the economy being affected to different levels. Based on your understanding of the situation, provide detailed answers for each of the components mentioned below.

Question 3A: What type of unemployment would a country like India experience from such a pandemic? Please provide an explanation. (2 marks)

Question 3B: What type of recession would be caused by such a pandemic? Provide an explanation. (2 marks)

Question 3C: What would happen to the aggregate demand and aggregate supply in India because of the above two phenomena? Elaborate your answer. (2 marks)

Question 3D: How will the AD/AS curves behave in this situation? Please elaborate your answer. (2 marks)

Question 4 (7 marks)

In a country like India, where such pandemics affect millions of people and severely hamper the economy:

Question 4A: 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)

Question 4B: 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)

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