Question

1.Jones works for a consulting firm and gets remunerated a
monthly wage of $500.00. He always spends all the $500.00 on buying
5kg of potatoes  only which he buys at $100/kg. One day, amidst of
Covid 19 pandemic, the price of potatoes increased to $120/kg. Due
to the snap change in the price, Jones supervisor approached him
and gave him two options to choose from:
i). Reduce Jones wage to $400.00 and supplying him with 30kg of
potatoes at $80/kg monthly.

ii). Increase his wage to $600.00
As a smart student of Principles of Economics and within a page, kindly
advise Jones to make a justified rational choice.

please help with this Economics

Answer 1

1) As, Earlier Jones income was $500 and he used to spend it all buying 5 kg of potato at rate of 100 per kg.

If price of potato rise to $120 due to pandemic.

Lets see each scenario separately :-

i) If his income is reduced to $400 and he is promised to get a supply of 30 kg of potato at the rate of $80. Now if he takes this option he would be able to buy $400/$80 = 5 kgs of potato as before. But since he has been promised to get a supply of 30 kgs he can use the rest 25 kg to carry out a business and earn as the price prevailing in market in $120/kg while he is getting potato at $80/kg. So he can first buy 5 kg at 80/kg and sell it at 120/kg and keep on doing this till he has sold 25 kg and then for the remaining 5 kgs he can keep it for himself.

• By this way Jones not only gets 5kgs of potato but also earn some income by doing business.

ii) In this scenario when his income is just increased to $600 while price of potato in market is $120 he can buy $600/$120 = 5kgs of potato just as before. So he is indifferent to his situation before pandemic.

• By this way Jones would only get 5kgs of potato.

So, We can see in both cases Jones gets 5kgs of potato but in the first option i he gets a chance to earn an additional income as well.

So, The rational choice for Jones is to choose Option i