Question

An individual has preferences for an aggregate consumption
commodity (x) and health (H) represented by a utility function U(x,
H) = αln(x) + βln(H). The price of the aggregate commodity (x) is
p_{x} and the price of medical care (m) is p_{m}.
The input of medical care (m) produces health (H) via a health
production relationship that can be presented by the function g(m)
= ln(m); that is H = ln(m).

**a.** Compute the optimal demand for medical care
(m), the aggregate consumption commodity (x) and health (H) as
functions of prices (p_{x}, p_{m}), income (y), and
the parameters of the model (α, β). You may assume a standard
budget constraint.

**b.** Calculate the price elasticity of demand for
medical care.

Answer #1

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