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 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

The Grossman's model deals with the fact that how education, health, age influence the production of health through the demand of health capital. In this case we will consider the case of education.

a. An increase in education that only increases productive efficiency that is education only increases the marginal product of health inputs. Health is not purchased from the market insteadily people use medical inputs the deal with their health issue. Health is a capital good. Consuners use medical inputs to make investments on like medicines, drugs or using remedies like exercise, food etc. As you increase the number of health care inputs, the effect on total health status. Education raises the marginal product of direct inputs. Investment in health capital.Schooling raises the marginam products of the endogenous inputs in healtg and other production functions.

b. An individual would only like to invest when the value of health has its only effect on earning future income. Health capital can be generated at less cost for educated people leading to less of investment that is higher rate of return at reasonable investment. Education is always found to improve the efficiency of the health inputs in a form of more investment. It always keeps us reminding about the side effects and proper utilization of medical inputs and treatments.

c. The tastes and preferences toward health and away from other goods and services. There had always been a positive relation betwe~n education and health. The education keeps rising the graph of medical treatment and inputs through different sources. Market forces allocate resources efficiently in health care and government many times distort such allocation. Human beings constantly makes decisions that require tradeoffs. Because of limited earning the tastes and preferences of individual matters. He has his own important wants which he has to fulfill in his limited earning. Health care has several independent market like education, institutional etc. Education determines the number of professionals that are trained to enter the market. several factors facilitate the working of the market like cost, demand etc. The demand of health care is derived from individual's wish. The qualities of products make it difficult for market to meet the demand. the ability of the market to determine resource allocation is greatly reduced in this case.