1. A. Due to the utility function U(H,B) point C violates the utility function because it is not consistent with the marginal utility that increases from Point A to C in this model. Point C implies that this person can only be made better off with bread and not health.
B. If point C is chosen their utility function would look like the the utility function labeled U1. (This is similar to a utility function with homothetic preferences)
C. Point E can never be an equilibrium because given the production possibilities curve, the individual can reach higher health and bread utils. Thus, point E implies that the individual prefers less health and bread. D. In the Grossman model, depreciation is part of the model (Ht+1 = Ht - Ht + It) and represents …show more content…
Grossman suggests that the: cost of health capital = r + where r is the interest rate and is the depreciation rate. Thus as r decreases, the cost of health is decreasing as well. With lowered costs of health capital, the consumer does not have to spend as much to purchase health / medical services. In addition, because costs have decreased, consumer health increases at a higher optimal level than before, because the price drop will help them attain more health.
F. The Grossman model is built around the idea of time and money constraints. If Pb is the price of bread, Pm is the price of medical services, Tl is the time lost due to sickness, Th is the time spent investing in health, Tb is time making bread, Tw is time spent at work, and r is the interest rate, then the budget constraint is:
In layman 's terms, the budget constraint states the present discount value of expenditures on medical services (M) and Bread (B) equals to present discount value of wage income. This means that the budget constraint allows the individual to satisfy his lifestyle with only two constraints in this model, medical services and …show more content…
Since, medical services prices are exogenous and do not depend on individual preferences, their price will price will stay constant. Thus, when wage increases, consumer can but more of time between work and leisure.
2. A. Risk-averse individual. The first order condition chosen is U’(Cb) = U’(Cg) = ½(Cg)^(-1/2) = 1/2*(Cb)^(-1/2), FOC is at maximum and thus c=0
B. Risk-loving individual. The first order condition is 2Cg = 2Cb, FOC is at minimum and thus c=0
C. m=1 means that health is good in Hg and Hb thus it does not affect H or the FOC. In result, this makes coinsurance equal zero.
D. As m decreases, coinsurance increase due to the utility function. A higher c is chosen. This is different from C because both states are affected in regards to coinsurance and consumption. This individual is better off with more consumption in the good state and less consumption in the bad state.
E. This utility function is opposite of question D. Thus, consumption is better to have in the bad state than in the good state. The C chosen is negative ( pooling.
Point C, since X and C are on the same line where Lows be fully insured and satisfies with that insurance.
4.
P
X
B. If point C is chosen their utility function would look like the the utility function labeled U1. (This is similar to a utility function with homothetic preferences)
C. Point E can never be an equilibrium because given the production possibilities curve, the individual can reach higher health and bread utils. Thus, point E implies that the individual prefers less health and bread. D. In the Grossman model, depreciation is part of the model (Ht+1 = Ht - Ht + It) and represents …show more content…
Grossman suggests that the: cost of health capital = r + where r is the interest rate and is the depreciation rate. Thus as r decreases, the cost of health is decreasing as well. With lowered costs of health capital, the consumer does not have to spend as much to purchase health / medical services. In addition, because costs have decreased, consumer health increases at a higher optimal level than before, because the price drop will help them attain more health.
F. The Grossman model is built around the idea of time and money constraints. If Pb is the price of bread, Pm is the price of medical services, Tl is the time lost due to sickness, Th is the time spent investing in health, Tb is time making bread, Tw is time spent at work, and r is the interest rate, then the budget constraint is:
In layman 's terms, the budget constraint states the present discount value of expenditures on medical services (M) and Bread (B) equals to present discount value of wage income. This means that the budget constraint allows the individual to satisfy his lifestyle with only two constraints in this model, medical services and …show more content…
Since, medical services prices are exogenous and do not depend on individual preferences, their price will price will stay constant. Thus, when wage increases, consumer can but more of time between work and leisure.
2. A. Risk-averse individual. The first order condition chosen is U’(Cb) = U’(Cg) = ½(Cg)^(-1/2) = 1/2*(Cb)^(-1/2), FOC is at maximum and thus c=0
B. Risk-loving individual. The first order condition is 2Cg = 2Cb, FOC is at minimum and thus c=0
C. m=1 means that health is good in Hg and Hb thus it does not affect H or the FOC. In result, this makes coinsurance equal zero.
D. As m decreases, coinsurance increase due to the utility function. A higher c is chosen. This is different from C because both states are affected in regards to coinsurance and consumption. This individual is better off with more consumption in the good state and less consumption in the bad state.
E. This utility function is opposite of question D. Thus, consumption is better to have in the bad state than in the good state. The C chosen is negative ( pooling.
Point C, since X and C are on the same line where Lows be fully insured and satisfies with that insurance.
4.
P
X