The Grossman Model (L3)

Question 1

Three roles of health in Grossman model

Answer 1

1. A consumption good
2. An input into production
3. A form of sock/capital (an investment)

Question 2

Single-period Utility at time Z

Answer 2

Ut= U(Ht, Zt)
Ht = level of health
Zt= “home good”

Question 3

Equation for how total time in a single period is spent

Answer 3

Θ = 24 = TW + TZ + TH + TS 
Divide total time Θ between:
Working TW
Playing TZ
Improving health TH
Being sick TS

Question 4

Producing H and Z

Answer 4

Ht = H (Ht-1, TtH, Mt)
Zt = Z (TtZ, Jt)
Mt= market inputs for health H
Jt= market inputs for home goods Z

Question 5

Production Possibility Frontier

Answer 5

the possible combinations of H and Z attainable, given an individual’s budget and time constraints

Question 6

Lifetime of utility

Answer 6

on any given day, an individual consider’s not only today’s utility but all future utility as well
sum[Ut= U(Ht, Zt)]
Health is a stock; some of it carries over each new period
Home good Z is a flow (it lasts for only 1 period)
δ = individual’s discount rate
A person values utility now more than in the future
Ω = individual’s lifespan (total number of periods)

Question 7

Health Depreciates over time

Answer 7

Ht = H ( (1- γ)Ht-1, TtH, Mt )
γ = rate of depreciation
Recall:
Ht = health at time period t
Ht-1 = health from previous period
TtH = time spent on health in period t
Mt = market inputs for health (like checkups and prescription pills)

Question 8

Costs to Investing in health

Answer 8

1. opportunity cost (forgoes putting money into other investments)
   r=interest rate of alternative market investment
2. depreciation due to aging (γ)
   health much pay a return of at least r + gamma
   it it doesn’t then market return beats health investment return

Question 9

Predictions of the Grossman Model

Answer 9

1. Better health among the educated

2. Declining health among the aging

Question 10

Explanation of why better educate are healthier

Answer 10

more efficient producers of health
more efficient at each level of health investment
MEC(college graduates)>MED(high school dropout)
Optimal Health is higher for better educated

Question 11

How do people choose their optimal health?

Answer 11

Hypothesis is that for less educated people, it is less efficient to produce health, so their time is better spent on W and Z