During the past major recession, upscale hotels in the United States recently cut their prices by 25 percent in an effort to bolster dwindling occupancy rates among business travelers. A survey performed by a major research organization indicated that businesses were becoming wary of bad economic conditions and began resorting to electronic media, such as the Internet and the telephone, to transact business. Assume a company’s budget permits it to spend $6,000 per month on either business travel or electronic1 media to transact business. Graphically illustrate how a 25 percent decline in the price of business travel would impact this company’s budget set if the price of business travel was initially $1,200 per trip and the price of electronic media was $600 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. Is the company allocating resources efficiently? Explain.
During the past major recession, upscale hotels in the United States recently cut their prices by 25 percent in an effort to bolster dwindling occupancy rates among business travelers. A survey performed by a major research organization indicated that businesses were becoming wary of bad economic conditions and began resorting to electronic media, such as the Internet and the telephone, to transact business. Assume a company’s budget permits it to spend $6,000 per month on either business travel or electronic1 media to transact business. Graphically illustrate how a 25 percent decline in the price of business travel would impact this company’s budget set if the price of business travel was initially $1,200 per trip and the price of electronic media was $600 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. Is the company
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