Question

You are an owner of a bakery, and you meet with other neighborhood bakery owners. Consider that fresh baked goods and processed baked goods are substitutes. In an attempt to increase sales, you collectively decide to lower prices of fresh baked goods by 10%. Which of the following are consequences of this price change? Choose one or more: A. The supply of fresh baked goods will increase. B. The quantity supplied of fresh baked goods will decrease. C. The supply of fresh baked goods will decrease. D. Demand for processed baked goods will decrease. E. The demand for fresh baked goods will not change. F. The demand for fresh baked goods will increase. 1st attempt

Answer 1

Answer: Option E

Explanation: The supply and demand for goods depends on a number of factors two of which is price of goods and price of substitute goods.

Substitute goods are the goods which can be used at one others place easily. For example - Pepsi and coke are substitutes of each other, if there is a rise in price of pepsi,. consumers will shift their demand to coke and demand for pepsi will decrease.

The price effect is simple, if the price of a commodity will rise consumers will eventually demand less of it .

Therefore,

As, the price of fresh baked goods decreases the demand for processed one decreases and of fresh baked increases.