Richard receives government transfer payments and currently consumes 5 guns and 6 goose livers. Assume the price of guns decreases by 10 and the price of goose liver increases by 20. The government raises Richard's transfer payments so he can still afford 5 guns and 6 goose livers. Does this constitute a true cost-of-living adjustment (COLA)?
A) No. Richard is overcompensated.
B) No. Richard is undercompensated.
C) Yes. The payment just achieves the right level of compensation.
D) Not enough information.
Question 2
A true cost-of-living adjustment (COLA) in response to a change in prices would compensate consumers so that they would be able to
A) purchase the same bundle they purchased before prices changed.
B) achieve the same level of utility they did before prices changed.
C) face the same choices they did before prices changed.
D) achieve an increase in utility that is equal to the rate of inflation.
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