In the Grossman model of health production, people maximize lifetime utility overconsumption of health (H) and a composite of all other goods (X). In the model, health is a stockthat evolves over time and depends upon health in the previous period (Ht-1), investments inhealth during the previous period (It-1), and a depreciation rate (γ). The level of health in period tis Ht=(1- γ)Ht-1+It-1.a. Consider two individuals with H=50 in the current period. The two individuals areidentical except that individual A is 20 years old and has a γ of 0.1, while individual B is30 years old and has a γ of 0.2. Explain why it is more difficult for individual B tomaintain the same level of health as individual A.b. Give 2 real-world examples of how an increase in education would improve a person’sproductivity of health investment (I).
In the Grossman model of health production, people maximize lifetime utility over
consumption of health (H) and a composite of all other goods (X). In the model, health is a stock
that evolves over time and depends upon health in the previous period (Ht-1), investments in
health during the previous period (It-1), and a
is Ht=(1- γ)Ht-1+It-1.
a. Consider two individuals with H=50 in the current period. The two individuals are
identical except that individual A is 20 years old and has a γ of 0.1, while individual B is
30 years old and has a γ of 0.2. Explain why it is more difficult for individual B to
maintain the same level of health as individual A.
b. Give 2 real-world examples of how an increase in education would improve a person’s
productivity of health investment (I).
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