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A bakery can produce either cakes or cookies. If the price of cookies rises, what will happen to the production of cakes?

Answer :

If the price of cookies rises, the bakery might decrease cake production and shift resources to cookie production to maximize profits. This is due to the substitution effect, which affects producers' decisions based on price changes and profit opportunities.

If the price of cookies rises, producers may reallocate resources to increase cookie production to capitalize on higher potential profits. This situation is known as the substitution effect in economics, where producers substitute the production of one good for another based on relative prices and profit opportunities. As a result, production of cakes might decline because the bakery's resources may be redirected to producing more cookies.

This concept is similarly displayed when the price of complementary goods changes, affecting demand for related products. For instance, a drop in doughnut prices may boost coffee demand, shifting the demand curve to the right. Conversely, if the price for a substitute good like tea decreases, coffee demand might decrease, shifting its demand curve to the left.

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