Question

In: Economics

Assume the health production function is h = 365 − 1/H, where h is the number...

Assume the health production function is h = 365 − 1/H, where h is the number of healthy days a person has in each year and H is the person’s health capital. Assume this person earns a wage of $100/day, and the marginal cost of health investment π = 25 and is constant over time. The annual interest rate is 5 percent, and health capital depreciates at a rate of 35 percent per annum.

Find the optimal level of health this person demands under the above conditions.

		4.47
		2.55
		3.16
		4.67

Expert Solution

Correct Answer : 3.16

So, 3.16 is the optimal level of health this person demands under the above conditions.

Solution & Explanation :-

Given,

wage rate (w) = $100/day

marginal cost of health investment (π) = 25

Health production function (h) = 365 - 1/H

annual interest rate (i) = 5% = 0.05

depreciation rate = 35% = 0.35

Appreciate rate (a) = 0

Now,

for Marginal Efficiency of Health Capital Curve (MEC),

Rahul Sunny answered 2 years ago

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