Question

3. Using Grossman’s pure consumption model of the demand for health, consider the impact of the following on the optimal stock of health, the optimal amount of health inputs to purchase, and the optimal spending on all other goods and services other than on health inputs:

a. An increase in education that only increases productive efficiency (i.e. education only increases the marginal product of health inputs)

b. Suppose that the increase in education in part a. was simultaneously associated with with an increase in the persons daily wage rate.

c. How does changing the person’s tastes and preferences toward health and away from other goods and services affect the answers to a and b above?

Answer 1