When Post Cereals, the Producer of Grape Nuts (GN), Was

question 99

Multiple Choice

When Post cereals, the producer of Grape Nuts (GN) , was going to acquire Nabisco's Shredded Wheat (SW) , Post wanted to know how a price increase in GN would affect profitability and whether to increase price before or after the merger. After fitting the log-linear function, log(QGN) = 1.998 - 2.085 log(PGN) + 0.62 log(I) + 0.14 log(PSW) , Post cereals concluded that:

• A) The two cereals were close substitutes, so the lost revenue from an increase in the price of one would be recovered by the increased sales in the other.
• B) The cross-price elasticity confirmed that the two cereals were substitutes, but not close substitutes.
• C) There would be a large increase in the quantity demanded of Grape Nuts in response to an increase in the price of Shredded Wheat.
• D) The demand for Grape Nuts was both price and income inelastic.

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