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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Definitions:

Economic Order Quantity

A calculated order size that minimizes the total cost of holding and ordering inventory.

Orders per Year

This metric calculates the number of orders placed with a company or within a supply chain system within a year, indicating the demand or sales volume.

Price Discount

A reduction from the original or standard price of a product or service, often used to stimulate sales or clear out inventory.

Lot Size Based

Pertains to the method of quantity determination for production or ordering, where items are processed or ordered in specific batch sizes to optimize production efficiency or cost.