Clearly what is happening here is a reduction in demand. Warmer temperatures would naturally lead to reduced demand for wool socks. As we learned earlier, in perfect competition this causes the industry demand curve to shift back, lowering price and leading to short run losses (negative profits) in the short run.

The graph below illustrates the short run effect of a reduction in demand in a perfectly competitive industry:

1. higher prices and greater output of wool socks. The only way that both quantity and price can increase is if there were an increase in demand.
2. increased profits for wool sock firms. This could occur only if demand rose or if costs fell, neither of which is consistent with the question.
3. lower prices, lower quantities and higher profits for wool sock firms. For price and quantity to both fall demand would have had to decrease, leading to reduced profits not increased profits.
4. lower prices, lower quantities and losses for wool sock firms.
5. lower prices, lower quantities and zero profits for wool sock firms. This can't be a short run solution since an adjustment back to zero profits requires long run time.