Economic Moats & Macro

Question 1 (10 marks)

(a) Primary moat = Network effect (2). Mechanism: more users attract more restaurants, and more restaurants attract more users — a two-sided virtuous loop where value to each side rises with the size of the other (2).

(b) QuickBite attacks the supply/restaurant side (1) by removing commission. If restaurants defect to QuickBite, the selection on FoodSwipe shrinks, reducing user value, which can trigger a reverse network effect (users leave → fewer restaurants → collapse) (2).

(c) Any valid structural switching-cost mechanism (2) + justification (1). Examples:

• Integrated POS/inventory + loyalty data locked into FoodSwipe → restaurant loses accumulated customer data & workflow if it leaves.
• Subscription/loyalty programme for users (credits, ratings history) making users reluctant to restart elsewhere. Justification must reference cost/friction of leaving, not price.

Question 2 (10 marks)

(a) (1 mark each, force + justification):

• Threat of new entrants: Low — high capex, quarry (limestone) access & 300 km transport limit create regional barriers.
• Threat of substitutes: Low — few viable substitutes for structural cement.
• Bargaining power of buyers: Medium–High — large bulk infrastructure buyers, undifferentiated product lets them push price.
• Bargaining power of suppliers: Low–Medium — limestone often captive/quarry-linked; moderate.
• Competitive rivalry: High — 6 similar-cost producers, undifferentiated product → price competition.

(Accept reasoned High/Med/Low; full mark needs justification.)

(b) Verdict (2) + reasoning (1): Not attractive for a new entrant — despite low substitute/entrant threat protecting incumbents, high rivalry + strong buyer power compress margins, and the same entry barriers that protect incumbents (capex, quarry access) work against the newcomer. (3)

(c) Most important: Competitive rivalry (1) — reduce it via capacity discipline / regional consolidation / product differentiation (blended/specialty cement, branding) to escape pure price war (1).

Question 3 (12 marks)

(a) Bond price falls (1) because yields and prices move inversely. % change ≈ −ModDuration × Δyield = −7.2 × 0.5% = −3.6% (3).

(b) Gordon Growth: $P = \dfrac{D_1}{r-g}$.

• Old: $P_0 = \dfrac{20}{0.09-0.04} = \dfrac{20}{0.05} = ₹400$ (2)
• New: $P_1 = \dfrac{20}{0.096-0.04} = \dfrac{20}{0.056} = ₹357.14$ (2)
• % change $= \dfrac{357.14-400}{400} = -10.71\%$ (1)

(c) The stock's value depends on the denominator (r − g), which is small; a small rise in r causes a large proportional rise in the denominator, magnifying the price fall (a duration/convexity-like effect for long-duration equity). Growth stocks have most cash flows far in the future → more rate-sensitive than a bond with fixed near-term coupons. (3)

Question 4 (10 marks)

(a) Real growth ≈ Nominal − Inflation = 11% − 6.5% = ≈4.5% (2). Approximation: subtract deflator/inflation from nominal growth (Fisher approximation) (1).

(b) Any one (2): CPI weights consumer items (food, housing, services) which have risen faster; WPI has heavier weight on manufactured/commodity goods whose prices softened; services inflation not captured well by WPI.

(c) Fiscal deficit % = $\dfrac{18}{300}\times100 = 6\%$ (2). This exceeds the common 3% target — roughly double (1).

(d) Cutting rates amid 6.5% inflation (2): lowers real yields → discourages foreign capital / encourages outflows → currency depreciation, which can further import inflation (a vicious loop).

Question 5 (8 marks)

(a) Trough / early recovery (bottom of the cycle) — falling rates + turning-up leading indicators signal the transition out of recession. (2)

(b) Two sectors (2 each):

• Financials / Banks — benefit early from falling rates and reviving credit demand.
• Consumer Discretionary / Autos — cheap credit + improving confidence lift big-ticket spending. (Also acceptable: Industrials, Technology, small-caps.)

(c) Underweight (2): Defensives — Utilities / Consumer Staples / Healthcare — they lag in recovery as capital rotates into cyclicals for higher growth.

[
  {"claim":"Bond price change ≈ -3.6% using ModDur 7.2 and 0.5% yield rise","code":"mod_dur=7.2; dy=0.005; pct=-mod_dur*dy*100; result = abs(pct - (-3.6)) < 1e-9"},
  {"claim":"Gordon stock value falls from 400 to ~357.14 (-10.71%)","code":"P0=20/(0.09-0.04); P1=20/(0.096-0.04); pct=(P1-P0)/P0*100; result = (abs(P0-400)<1e-9) and (abs(pct-(-10.7142857142857))<1e-6)"},
  {"claim":"Fiscal deficit is 6% of GDP","code":"fd=18/300*100; result = abs(fd-6)<1e-9"},
  {"claim":"Approx real GDP growth = 4.5%","code":"real=11-6.5; result = abs(real-4.5)<1e-9"}
]