Upscale hotels in the United States recently cut their prices by 20% in an effort to bolster dwindling occupancy rates among business travelers. A survey performed by a major research organization indicated that businesses are wary of current economic conditions and are now resorting to electronic media, such as Internet video conferencing, to transact business. Assume a companyâs budget permits it to spend $5,000 per month on either business travel or electronic media to transact business. Graphically illustrate how a 20% decline in the price of business travel would impact this companyâs budget set if the price of business travel was initially $1,000 per trip and the price of electronic media was $500 per hour. Suppose that, after the price of business travel drops, the company issues a report indicating that its marginal rate of substitution between electronic media and business travel is -1. Explain whether the company is allocating its resources efficiently, and if not, explain how the company may improve its resource allocation by increasing its business travel or increasing its usage of electronic media.
Upscale hotels in the United States recently cut their prices by 20% in an effort to bolster dwindling occupancy rates among business travelers. A survey performed by a major research organization indicated that businesses are wary of current economic conditions and are now resorting to electronic media, such as Internet video conferencing, to transact business. Assume a companyâs budget permits it to spend $5,000 per month on either business travel or electronic media to transact business. Graphically illustrate how a 20% decline in the price of business travel would impact this companyâs budget set if the price of business travel was initially $1,000 per trip and the price of electronic media was $500 per hour. Suppose that, after the price of business travel drops, the company issues a report indicating that its marginal rate of substitution between electronic media and business travel is -1. Explain whether the company is allocating its resources efficiently, and if not, explain how the company may improve its resource allocation by increasing its business travel or increasing its usage of electronic media.
