Final answer:
An increase in the price of flour, a key input for making bagels, reduces the supply of bagels which may increase the price of bagels, leading to a reduction in the demand for the complement good, cream cheese. If the price of milk rises, supply of cream cheese decreases. However, a health study favoring cheese could increase demand by 20% despite higher prices.
Step-by-step explanation:
The question pertains to the effects that changes in the price of inputs have on complement goods, using the example of bagels and cream cheese where bagels require flour and cream cheese requires milk to produce. When the price of flour increases, which is an input for making bagels, the production cost for bagels also rises. This typically leads to a reduction in the supply of bagels since producers may not be able to sell as many at the same price with increased costs. This reduced supply of bagels can lead to a higher price for bagels. As bagels and cream cheese are complement goods, the decrease in supply and increase in price of bagels can reduce the demand for cream cheese because consumers are less likely to buy cream cheese if they are buying fewer bagels. Similarly, if the price of milk, a key input for cheese production, rises, it can result in a decrease in the supply of cream cheese by 80 pounds at every price. Moreover, an external factor such as a new study promoting health benefits of cheese, increasing demand for cream cheese by 20% at every price, creates an interesting scenario where despite the reduced supply due to increased production costs, demand might still increase due to perceived health benefits.