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 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 $ 6,000 per month on either business travel or electronic 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.
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