Question

Using Grossman model explain what would happen to the demand for health stock as people get older and their preferences for health change. Assume that older people value health more than younger people. 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. Upload your picture here.

Answer 1

Grossman model believes individuals will consider the cost and benefits while taking decisions about investing in health.Grossman model considers health as a capital good.Heakth capital is also subjected to depreciated or worn out.The drpreciation depreciation hunancapital is more in olden ages of individual than the younger ages of the individual.Eventhough the health of individuals gets depreciated over time it can be replenished through various investments like investment in medical care,following proper diet and exercises will reduce the depreciation of health capital.

This can be explained with the help of diagram given below.In Dig 1 H⁰ shows the optimal point or point of equilibrium.MEI curve is downward sloping which indicates decreasing Marginal Efficiency of Investment capital.The rate of depreciation increases when the individuals gets older.MC¹ is the initial cost
Now in Dig 2 the marginal cost increases from MC¹ to MC² as the health of older individuals deteriorates more than the younger individuals .The optimal health stock will decrease and reaches to H¹ from H⁰ and when the wages increases the optimal health stock increases from H⁰ to H² and ME curve will shift to the right.