Explore BrainMass
Share

Explore BrainMass

    Budget and Marginal Rate of Substitution

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Upscale hotels in the United States recently cut their prices by 25% 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% decline in 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.

    © BrainMass Inc. brainmass.com May 20, 2020, 11:44 pm ad1c9bdddf
    https://brainmass.com/economics/managerial-economics/budget-and-marginal-rate-of-substitution-588759

    Solution Preview

    Define the following variables:

    = price of business travel
    = price of electronic media per hour.
    = total budget per month.

    Write an inequality relating the price of business travel and the price of electronic media ...

    Solution Summary

    A step-by-step solution with equations and two graphs is provided in a .png.

    $2.19

    ADVERTISEMENT