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7 April, 16:38

Several years ago, Alcoa was effectively the sole seller of aluminum because the firm owned nearly all of the aluminum ore reserves in the world. This market was not perfectly competitive because this situation violated the:A) price-taking assumption.

B) homogeneous product assumption.

C) free entry assumption.

D) A and B are correct.

E) A and C are correct.

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  1. 7 April, 20:15
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    E) A and C are correct.

    Explanation: A and C are correct because:

    1. A price taking firm is a perfectly competitive firm; a firm that cannot influence the market price. It does not set the market price and is only in business to sell at the prevailing market price, or lower its prices to attract customers.

    Therefore, Alcoa has violated this assumption because it is the sole seller of aluminum and is not a price taker but rather a Price Maker. Alcoa can set the price of aluminum to any level it likes at it enjoys pricing power.

    2. Free entry assumption: free entry is one of the qualities of a perfectly competitive market, because firms can easily come into the business with little or no hindrance.

    Alcoa has however violated this assumption because it owns nearly all the aluminum ore reserves in the world. It would therefore be very difficult or impossible for another firm to gain free entry into the aluminum business.
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