Hmm, it seems kinda arbitrary then, do they consider University of Chicago better than say Northwestern or vice-versa?? Which schools are prestigious enough to get this factor, I mean surely there are some grey-area schools that may or may not be considered "prestigious" enough to get this gpa-boost. I suppose they could rely on the highly accurate US NEWS and WORLD REPORT rankings (Sarcasm).
It seems to me that this line of argument applies to your undergrad, then the difficulty of your major should be taken into account also. However, who is to say that a dance major is easier than say a physics major? (synonymous with saying, Upenn is more difficult than Podunk)
In the end, the difficulty of a school/major depends on the teaching style (does the teacher give extra credit, does he/she curve), teaching effectiveness, textbook quality, etc, etc, etc, etc.
My personal opinion is that I do not think MOST adcoms give preference to your undergrad institution/major. It seems to me that this line of thinking is too generalized (I mean how can you assume that a person from an ivy school has had it harder than someone from podunk?). Remember though, I emphasize the word MOST because I am sure some adcom members do get entranced by the "prestigiousness of a school"
My 3 1/2 cents =)