I think "in" here is a preposition and you simply ask: wo arbeitet der Bäcker? In der Bäckerei.
look here: http://mein-deutschbuch.de/files/grammatik/praepositionen/praepositionen.pdf
I feel like that would be plausible in a modern German conversation, but Duolingo teaches the very fundamentals of it, and keep in mind most of what you learn on here is not how they would talk in Berlin, Frankfurt, or anywhere in Germany. Just like how English evolved to have it's slang terms, German evolved to change it's language in general.
Certainly in Scotland (where we can speak English if we try) 'the Baker's' usually refers to the shop where you buy bread and behind which is usually (but not always) a small bakery. 'The bakery' tends to refer to a building that makes bread and cakes but may not have a shop and does not necessarily sell straight to the public.