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Any suggestions on eating "at" grocery stores and staying at youth hostels in Iceland?

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My husband and I have resolved to spend as little money as possible on food and lodging during our trip to Iceland. So prevailing wisdom would suggest that we stay at youth hostels and buy are food at the grocery store. Am I correct in this assumption?
If this is correct, does anyone have any advice about youth hostels to avoid or ones to visit that are fabulous? Also, do most youth hostels have a shared kitchen? If so, do they have pots and dishes, or is it a "bring your own" kind of thing? What other "supplies" would you reccommend while staying in a youth hostel (we have never done it before)?
On the topic of grocery store food: What are prices like on basic food items needed to make simple meals : bread, cheese, meat, fruit, yogurt, canned items, etc.? When traveling around the ring road, are grocery stores common? Are there any suggestions to add varienty to simple grocery store meals... because I am sure that sandwiches are going to get a little boring after about the tenth time ;-)
Thank you in advance for all of your suggestions.

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