Before an uneven rise in prices Allan consumed 5 bread and 6 juice.After the price increase and with an increased welfare payment from the government Allan consumes 4 bread and 7 juice.Does the government payment represent a true cost-of-living adjustment (COLA)?
A) Yes, if the two consumption bundles lie on the same indifference curve.
B) Yes, if the second bundle yields more utility than the first.
C) No, the first bundle is clearly preferred.
D) Not enough information.

Question

Quizplus · Accepted Answer

The government payment represents a true cost-of-living adjustment (COLA) if Allan's welfare after the price increase and adjustment allows him to reach the same level of utility as before, which is indicated by the two consumption bundles lying on the same indifference curve.

Before an Uneven Rise in Prices Allan Consumed 5 Bread