Elucidate how a decline in the cost of business travel

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Reference no: EM1354552

upscale hotels in the United States recently cut their prices by 20% in a 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 the internet and the telephone, to transact business. Assume a company's budget permits it to spend $5,000 a 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 company's budget 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 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?

Reference no: EM1354552

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