Each month Paul spends a fraction of his income on food. If he spends the entire amount, he can buy 2 sacks of rice at $50 per sack, 4 sacks of potatoes at $25 per sack, and 4kg of lentils at $12.50/kg. Let R = # sacks of rice Paul consumes, P = # sacks of potatoes " " & L = # kg of lentils.
(i)How much money does Paul spend for food each month?
(ii)Write down Paul’s budget equation in terms of R, P and L.
(iii)Paul wants to see how much he spends on each item in terms of lentils. In other words he wants to use lentils as his numeraire good. Rewrite budget eqn and use it to answer parts (iii) to (v)
(iv)What is the price of sack of rice in terms of 1kg of lentils?
(v)What is the price of sack of potatoes in terms of 1kg of lentils?
(vi)What is Paul’s food budget in terms of 1kg of lentils?
answers: i) F = 2(50) +4(25) +4(12.5) = 250
ii) F = 50R +25P + 12.5L
iii) L = (F -50R +25P)/12.5, = 20 -4R +2P
iv) 4 of 1 kg lentils
v) 2 of 1 kg lentils
v) 20 of 1 kg lentils
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