Answer to Question #173915 in Microeconomics for Gabby

Question

Peter eats rice that costs $5 per kg and pasta that costs $10 per kg. The relative price of 1 kg of pasta is 2 kg of rice. At their current prices, Peter consumes 1 kg of pasta and 2 kg of rice. Due to some technological advances in rice cultivation, there is a fall in rice prices from $5 a kg to $2 a kg. 

A. Calculate the new relative price for 1 kg of pasta.

Answer 1

If new price for rice is 2 usd and price of pasta costs 10 usd, then Peter can buy 5 kg of rice instead of 1 kg of pasta for the same price. This means the relative price of 1 kg of pasta is 5 kg of rice.