Question

In a small country near Baltic sea there are three commodities

Answer 1

Explanation:

Let's start by writing down all the components of the problem:

1. Potato's sacs ( P ) cost 2 crowns, denote the price of a potato sack by P_p 

2. Meatballs ( M ) cost 4 per crock, denote P_m as the price of meatballs

3. Jam cost 6 per jar ( J ), denoted P_j as the price of jam.

4. Gunnar has an Income: M=360

His budget constrain is then:

• The amount he spends in potatoes $P_p \times P$
• The amount he spends in meatballs $P_m \times M$
• The amount he spends in jam $P_j \times J$

He only spends money on those goods, then his expenditures equal his income:

$I=P_p \times P+P_m \times M +P_j \times J$

$360=2 \times P +4 \times M +6 \times J$

(b) Next we need to re-express all prices so relative prices are the same as before:

If the new price of potatoes is $P^{'}_p=1,$ then the price of meatballs will be: $P^{'}_m=\frac{P_m}{P_p}=\frac{4}{2}=2$

(c) the same can be done for jam:

If the new price of potatoes is $P^{'}_p=1,$ then the price of meatballs will be: $P^{'}_m=\frac{P_m}{P_p}=\frac{6}{2}=3$

(d) Gunnar's Income would be than half as before: $I^{'}=\frac{I}{P_p}=\frac{360}{2}=180$

(e) We can summarize everything re-expressing Gunnars budget constraint

The old budget constraint was: $I = P_p \times P +P_m \times M + P_j \times J$

Now setting $P^{'}_p=1,$ is the same as dividing everything by $P_p=2$

$\frac{I}{Pp}=\frac{P_p}{P_p}\times P+\frac{P_m}{P_p}\times M + \frac{P_j}{P_p}\times J$

$I^{'}=P+P^{'}_m\times M +P^{'}_j\times J$

$180 = 1 \times P +2 \times M + 3 \times J$

Answer:

(a) $360 = 2 \times P +4 \times M +6 \times J$

(b) 2

(c) 3

(d) 180

(e) $180 = 1 \times P +2 \times M + 3 \times J$