Final answer:
The decreased demand in China for domestically produced baby formula leads to a price decrease, while increased demand for foreign-produced formula results in a price increase, making option (b) the correct answer.
Step-by-step explanation:
In recent years, the high-profile cases of contamination in Chinese-produced baby formula have affected consumer confidence, leading many Chinese parents to purchase baby formula produced outside of China. This shift in consumer preference is likely to affect baby formula prices. When demand for a product outside China increases, while demand for the Chinese equivalent decreases, the likely effect is a decrease in the price of baby formula produced in China due to lower demand. Conversely, there will likely be an increase in the price of baby formula produced outside China as increased demand may lead to a shortage in supply, thus pushing prices up. Therefore, the correct answer to the student's question is (b) a decrease in the price of baby formula produced in China and an increase in the price of baby formula produced outside China.