Q5 of 15 Page 5

How is the optimal amount of labour determined in a perfectly competitive market?

The optimal amount of labour determined in a perfectly competitive market as:


VMPL=W
where W = Wage rate
VMPL = Value of Marginal Product of Labour.



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3

Explain how price is determined in a perfectly competitive market with fixed number of firms.

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How is the equilibrium number of firms determined in a market where entry and exit is permitted?

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What will happen if the price prevailing in the market is

(i) Above the equilibrium price.


(ii) Below the equilibrium price.


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How a fall in price of tea will affect an equilibrium price of coffee? Explain the chain effect.