Modelling Health

Question 1

Draw a graph to demonstrate intertemporal choice.

Answer 1

Question 2

What does the slope of the budget line represent on an intertemporal choice diagram?

Answer 2

The ratio of prices between two time points

Question 3

Draw a graph to demonstrate the labour-leisure trade off

Answer 3

Question 4

What determines the slope of the budget constraint on a labour-leisure trade-off diagram?

Answer 4

The hourly wage

Question 5

Why is the budget line fixed on the X-axis for a labour-leisure diagram?

Answer 5

The maximum point on the X-axis represents spending all your time doing leisure activities (e.g. 24 hours a day). This cannot be increased as time is limited.

Question 6

Briefly describe the premise of the Grossman model of health demand

Answer 6

In the Grossman (1972) model of health demand, health is a commodity that produces ‘healthy time’. It posits that utility is a function of both health and consumption of goods that return happiness.
Within that, health is a function of previous health, time spent improving health, and healthcare.
Happiness is a function of time spent playing and good purchased to play with.
In this model, people demand health, not healthcare.

Question 7

What are the constraints of the Grossman model?

Answer 7

1. The initial endowment of health at birth
2. Time
3. Income
4. Prices

Question 8

Describe the two trade-offs within the Grossman model of health

Answer 8

1. The time trade-off - individuals must trade-off between time spent playing, working and improving health.
2. The goods trade-off - individuals must trade-off between health and happiness

Question 9

Draw and describe the production possibility frontier for health (H) and happiness (Z). Where would the rational person choose to consume and why?

Answer 9

The graph represents all the possible combinations of consuming health and happiness.
The rational consumer would choose to produce at a point between C and E. Here, consumers can have more health and happiness than at Point A with their given production possibility, and will be on a higher indifference curve than at Point B.

Question 10

What are some criticisms of the Grossman theory?

Answer 10

Sepehri (2015) argues that the model does not take into account
- The body’s ability to heal without medical care
- Uncertainty surrounding state of health and effectiveness of healthcare
- Asymmetric information
- Wider social determinants that may contribute to ill-health outside of the individual’s control

The concluding argument is that Grossman overestimates the extent to which individuals can control their health state.