Question
Upscale hotels in the United States recently cut their prices by 20 percent in an effort to bolster dwindling occupancy rates among business travelers.A survey
Upscale hotels in the United States recently cut their prices by 20 percent in an effort to bolster dwindling occupancy rates among business travelers.A survey performed by a well-regarded 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 to spend $5,000 per month on either business travel or electronic media to transact business.Suppose the price of business travel was initially $1,000 per trip and the price of secure electronic media is $500 per hour.
a. Draw a diagram to illustrate the original budget constraint facing the company for number of business travel trips
and electronic media usage per hour.Indicate the correct values of the X-intercept and Y-intercept on the
diagram.
b. On the same diagram, illustrate the new budget constraint facing the company if the price of business travel is
reduced by 20 percent.Indicate the correct values of the X-intercept and Y-intercept on the
diagram.
c. Suppose that the company issues after the price of business travel drops indicating that its marginal rate of
substitution between electronic media and business travel is -1.Is the company allocating resources efficiently?
Explain your answer in at most a few paragraphs.
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