Econ 450 Homework #3 Gilleskie
Homework Questions
From Health and Health Production lectures (chp 5 and 6)
1.) Write down a health production function that depends on the two inputs: amount of
medical care and hours of exercise. That is, provide the functional form and numerical
values (not just Greek letters and function notation). Be sure that the returns to both
inputs are positive but have diminishing returns. What does that last statement mean in
words? What is the marginal product of medical care?
From Demand for Health lectures (chp 7)
2.) List at least three factors that might increase an individual’s marginal efficiency of
investment in health capital.
3.) People who earn a higher salary can afford more of all goods, including health care.
However, according to Grossman, they will choose a higher desired health stock. Explain
why is this so using his model?
4.) Each of these questions is a good example of the type of question that demonstrates your
ability to use the Grossman model.
a. Suppose that John Smith gets promoted to a job that causes two changes to occur
simultaneously: John earns a higher wage, and a safer environment causes his
health to depreciate less rapidly. How would these two changes together affect
John’s desired health capital?
b. Suppose that John could work 365 days per year and could earn $200 per day for
each day he worked. Draw his budget line with respect to his labor-leisure
choice.
c. Suppose that John chooses to work 200 days per year. Draw the appropriate
indifference curve, and note his equilibrium wage income and labor-leisure
choices.
d. Suppose that John’s wage rises from $200 to $210 per day. Show how his
equilibrium level of income and labor-leisure will change.
e. Suppose that John is ill 10 days per year. Draw the impact of this illness on the
equilibrium defined in c. above. How will it change his equilibrium allocation of
earnings and labor-leisure?
