A True Cost-Of-Living Adjustment in Response to a Change in Prices

question 48

Multiple Choice

A true cost-of-living adjustment 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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Definitions:

Present Value

The current value of a future sum of money or stream of cash flows given a specified rate of return.

Incremental Cost Approach

A method that analyzes the financial information relevant to a decision by focusing on the additional or incremental costs involved.

Discount Rate

The interest rate used in discounted cash flow analysis to calculate the present value of future cash flows.

Salvage Value

The estimated residual value of an asset after it has reached the end of its useful life.