Question

Using Grossman model explain what would happen to the demand for health stock.Assume that John was working as a construction worker that is a very physically demanding job (meaning high depreciation rate of health). He was able to find another job in an office that would provide the same income but it is much safer and less physically exhausting meaning that his health depreciation rate is now lower. What would happen to John's demand for health stock? Draw a figure showing initial MEI, Marginal Costs and initial level of health stock. Then demonstrate appropriate changes/shifts in MEI, MC, and optimal level of health stock relative to the initial.

Answer 1

-1- The Grossman Model -

-Grossman Model of health demand is a model for studying the demand for health and medical care outlined by Michael Grossman in a monograph in 1972 entitled: The demand for health: A theoretical and empirical Investigation.

-The Model based demand for medical care on the interaction between a demand function for health and a production function for health and a production function for health. Andrew Jones, Nigel Rice, and Paul Contoyannis call the model the founding father of demand for health models.

2- In This Model, health is a durable capital good which is inherited and depreciates over time .

3- Investment in health takes the form of medical care purchases and other inputs and depreciation is interpreted as natural deterioration of health over time

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4-In The Model , health enters the utility function directly as a good people derive pleasure from and indirectly as an investment which makes more healthy time available for market and non- market activities.

5-Grossman's model of health capital

(1972a, 1972b, 2000c) is considered a breakthrough in the economics of the derived demand for medical care.

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6-The Model has been employed widely to explore a variety of phenomena related to health, medical care,inequality in health, the relationship between health and socioeconomic status.

7-Example-

-1- John was working as a construction worker that is (physically demanding job) ( High depreciation rate of health) . He was able to find a job at ( low depreciation rate of health)(along with Same income.)

2-The central proposition of the Grossman model.

3-( Grossman 1972) is that health can be viewed as a durable capital stock that produces an output of healthy time.

4- It is assumed that individuals inherit an initial stock of health that depreciates with age and can be increased by investment.

5-Grossman derives the demand for health from an optimal control model in which health capital is both a consumption and an investment good.

8- Example-

1-

2-

9- The Grossman Model was extended in a number of directions. Among the first to include uncertainty in the model were Charles Phelps and Maureen Cropper.

10- The relationship between education and health was expanded in the model by Issac Ehrlich .Regarding the relationship between education and medical care demand.

Example-

1-One Important question is whether the Marginal efficiency is less than or greater than one..If the curve is elastic ( Elasticity greater than one ),education will increase medical care.

2-On the other hand , if the curve is inelastic, education will decrease medical care.

3- Jan Action expanded the time constraint by including travel and waiting time in health care.