Question

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 an increase in the person's 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

Answer:

a. In particular Grossman argued that persons stock of knowledge affects his market and non market productivity, while his stock of health determines the total amount of time hence spend producing money earnings and commodities.

b.If increase in education in part was simultaneously associated with an increase in daily wages then the Grossman argument is only valid if the person with the increase in the education also spends in the health that is fits consumption and demand for health increases.

c.The change in the preference towards health and away from other goods and services means one part is invested in the health with increase in education and the other is neglected which is making the theory of grossman void because his theory says there is increase in human capital and also investment in health increases.