Question

A bakery can produce either cakes or cookies. If the price of cookies rises, then what happens to the supply curve of cakes?

1) The supply curve of cake shifts rightward.
2) There is a movement downward along the supply curve of cakes.
3) The supply curve of cake shifts leftward.
4) There is a movement upward along the supply curve of cakes.

Answer 1

If the price of cookies rises, the bakery might allocate more resources to cookie production, leading to a reduction in cake production.

Step-by-step explanation:

When the price of cookies rises and the bakery can produce either cakes or cookies, assuming cookies and cakes are alternative goods in production, the bakery may shift its resources to produce more cookies. As a consequence, the supply curve of cakes would shift. The correct answer is not to move along the existing supply curve but to recognize that the bakery's resources could be reallocated, causing a shift in the entire curve for cakes.

Due to the increase in the production of cookies, there would be fewer resources available for producing cakes, thus decreasing the quantity supplied of cakes at all possible prices. Therefore, the supply curve for cakes would shift to the left, indicating a decrease in the supply of cakes. Higher production costs as a result of increased wages or other factors typically lead to a similar leftward shift in the supply curve because it would cause the firm to supply a smaller quantity at any given price.