PS1 Econ 141 Key1

PS1 Econ 141 Key1 - Econ 141: Economics Health Consumers,...

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Econ 141: Economics Health Consumers, Spring 2011, Dr. Famulari Problem Set 1 Problem 1: Grossman model A. In the standard model of consumer choice, individuals choose among commodities that directly enter the utility function, U(X 1 , …X n ). What are three limitations of this model to describe consumer choice over medical goods i.e., where some of the X i are shots, surgeries, pap smears, proctological exams, etc. Medical goods such as the ones listed above hurt or are painful as so do not increase your utility directly and these goods are also not properly characterized as bads. Medical goods such as surgeries take substantial amounts of time to consume. Medical goods such as surgeries provide benefits that last many periods. B. Describe the aspects of health that make it an investment good. You can spend time and money today to increase your health in the future (reduced sick days per year and a greater number of years to live) C. In Grossman’s model, what are the four ways individuals use their time? Producing health, producing consumption goods, being sick and working. D. Describe the “Full Wealth” Constraint in the Grossman model. The full wealth constraint combines the budget and time constraints. It equates the maximum potential lifetime earnings and assets to lifetime expenditures (expenditures = cost of medical goods, cost of other goods consumed, and costs of time spent sick, producing health, and producing other goods). E. Grossman argued that we could understand the factors that influence the individual’s decisions regarding, say, the number of doctor visits per year if we realized that what consumers really want is the commodity health and they want health for two reasons: good health makes you happier and that good health gives you more time (by reducing the number of days that you are sick and increasing the days you live). Describe two factors that influence the demand for doctor’s visits in the Grossman model but do not influence the consumer’s demand for a doctor’s visit in the standard, utility model? The Grossman model predicts that, holding constant your income, more educated people will be healthier and this is not a prediction of the standard model. In the Grossman model, how productive you are in producing health affects the amount of health you consume. If you assume that more education makes you a more productive producer of health, then more
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education means more health consumption. More education plays no direct role in standard consumption model. An increase in the interest rate reduces the demand for health in the
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PS1 Econ 141 Key1 - Econ 141: Economics Health Consumers,...

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