Home » Upscale hotels in the United States recently cut their prices by 30% in an effort to bolster dwindling occupancy rates among business travelers.

Upscale hotels in the United States recently cut their prices by 30% in an effort to bolster dwindling occupancy rates among business travelers.

Upscale hotels in the United States recently cut their prices by 30% 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 the Internet, to transact business. Assume a company’s budget permits it to spend $7,000 per month on either business travel or electronic media to transact business. The price of business travel is currently $2,300 per trip and the price of electronic media is $300 per hour. Suppose that the price of business travel drops 10% to $600. Given this new price for business travel the company indicates that its marginal rate of substitution between electronic media and business is 1. Is the company allocating resources optimally? If not, what can they do? Explain.

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