I think that the spending is in line and very realistic for many poor people. If you ask a financially sophisticated person what he/she would do with a windfall of say $250,000 the response would likely be to pay off debt, invest/save, use it carefully, or something of the like. Generally, the person would not try to use it to increase his/her standard of living – it is a one time windfall!
Not so a poor person who is not financially sophisticated (which is not true for all poor people, but certainly is for these). The poor person’s response would likely be to get this or that and “live like a rich man for a while”, i.e. use the money extravagantly until it is gone. So he wasn’t buying the 1000 NIS esrog because he thought it was hiddur mitzvah, it was part of his mentality to use the windfall to live like a king for a while. The wife felt the same way (though buying an esrog wasn’t what fit her idea of “living like a rich man”.