Health Economics Professor Ashwini Sankar
Problem Set #1 Spring 2022
Due: Monday, January 31st
Instructions: Please type your answers into this Word file and upload it to the problem set answer
folder of the course Moodle page. Draw your diagrams by hand (use of a ruler highly
recommended), take photographs of the diagrams and insert them into the file. Higher marks will
be given to those who write clearly and draw precise diagrams (i.e., properly labeled, straight
lines, use of color if appropriate, etc.).
******** PLEASE UPLOAD ONLY WORD OR PDF DOCUMENTS********
1. (8 points) (Selected from comprehension questions in textbook) Indicate whether the
statement is true or false and justify your answer in either case.
(a) In the Grossman model, the marginal efficiency of investment in health care declines as
health improves.
(b) An hour spent exercising always pays for itself by decreasing the time spent sick by more
than an hour.
(c) People who drop out of high school are able to produce more health than college
graduates because they have more free time to invest in health production.
2. (12 points) (Question 3.12 in textbook) Suppose a new miracle pill is discovered that
increases both the marginal health effect of health investment (at any given level of health
investment) and the maximum level of health attainable from Hmax to a new, higher H’max.
a) Draw the old PPF (relating H and Z, with H on the horizontal axis and Z on the vertical
axis) before the discovery of the miracle pill.
b) On this same graph, draw a new PPF that corresponds to the description of the miracle
pill.
c) How will the miracle pill affect H*?
d) How will the miracle pill affect the rate of jogging?
3. (8 points) Read the Economist article “The Health Paradox”.
a) Explain the health paradox that is described in the article.
b) Why is it dangerous to have increasing health spending by the government?
c) What are some of the reasons why demand for health care is increasing? Use the article
as well as some of your other readings to answer the question.
4. (12 points) (Question 3.16 in textbook) Suppose we are considering a hungry individual in
the Grossman model deciding what to have for dinner. His options are listed in the table
below. Each dish has an effect on the level of the home good Z and health H.
Meal Home good (Z) Health (H)
Steak and eggs +7 -2
Kale salad with broccoli -2 +5
Entire box of cookies +10 -20
a) Suppose the diner's single-period utility function is U = 3Z +H. If the diner is trying to
maximize his single-period utility, and he can only select one item from the table above,
which meal would he choose?
b) A miracle pill is discovered that halves the negative health impact of cookies. How does
this impact the diner's choice?
