Before an uneven rise in prices Allan consumed five bread and six juice.After the price increase and with an increased welfare payment from the government Allan consumes four bread and seven juice.Does the government payment represent a true cost-of-living adjustment?
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

A true cost-of-living adjustment would allow Allan to reach the same level of utility after the price changes, which is possible if the two bundles of goods lie on the same indifference curve. This implies that Allan is able to achieve the same satisfaction or utility from both consumption bundles, despite the change in prices and the adjustment in his consumption pattern.

Before an Uneven Rise in Prices Allan Consumed Five Bread