14. The following diagram depicts the competitive market for hats before and aft

Question

14. The following diagram depicts the competitive market for hats before and after a demand shift. Based on this information, which of the following statements is correct? Select one answer a. After the demand shift, the market initially moves from A to E, before setting to the new equilibrium at F b. At E, the sellers are on the short side of the market. c. At E, lowering the price to $7 results in a Nash equilibrium for the buyers and sellers In the adjustment process from E to the new market equilibrium F, the sellers behave as price-makers while the buyers remain price-takers. d. 25 20 15 Supply Excess supply Eco : New demand Original demand Quantity of hats ('000s)

Explanation / Answer

The answer is a. As the demand shifts leftwards there is excess supply at the origin price. From point E the market reaches point F where demand equals supply and excess supply is wiped off.

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