Grossman Model of Health Demand: Investment, Production, and Policy Impacts

What does Grossman's model suggest about consumer behavior regarding health?

Consumers invest and disinvest in their health through choices like medical care, exercise, and diet.

What are examples of health investments according to Grossman's model?

Going to the doctor, buying medical care, exercising, and eating a balanced diet.

What are examples of health disinvestments?

Smoking, excessive drinking, and eating high-calorie or high-fat meals.

What criticism did Grossman's model face in the 1970s?

It was criticized for suggesting that people can choose their level of health.

What did Mokdad's 2004 findings indicate about modifiable risk behaviors?

They were associated with nearly 50% of all mortality in the US in 2000.

What lifestyle factors contributed to higher mortality rates in Nevada compared to Utah?

Lifestyle choices, particularly related to smoking and alcohol consumption.

What is the utility function in Grossman's model?

Ut = U(Ht, St), where utility increases with health status (H) and other commodities (S).

How is health classified in Grossman's model?

Health is both a consumption good and a capital good.

What does it mean that health is a capital good?

Health provides a stream of services over time, similar to how a car or refrigerator does.

What is the formula representing health stock in Grossman's model?

Ht+1 = Ht - δtHt + It, where It is gross investment in health and δt is depreciation.

What factors can lead to the depreciation of health stock?

Age, excessive alcohol consumption, smoking, illicit drugs, and genetics/disease.

What does the production function for health investments represent?

It shows how individuals invest in health using market inputs (medical care) and time inputs (health-producing activities).

What is the relationship between medical care and health in Grossman's model?

There is a positive relationship, but the marginal product of medical care diminishes with each additional unit.

How does increased time spent on health (TH) affect health stock?

More time spent producing health leads to a higher health stock for a given amount of medical care.

What effect does increased education have on health production?

It increases efficiency in converting medical care and time into health, raising the marginal product of medical care.

What is the formula for producing composite home goods (Z)?

Zt = Zt(Xt, TZt; E), where X is market inputs and TZ is time inputs.

How do individuals use money and time in relation to health?

Money is used to buy health care inputs and composite home goods, while time is used to produce health and home goods.

What is the budget constraint in Grossman's model?

Income = PmM + PxX, where Pm and Px are prices for health care and composite goods.

What does the time constraint in Grossman's model represent?

TT = TW + TH + TZ + TL, where TT is total time, TW is time working, TH is time producing health, TZ is time producing other commodities, and TL is time lost due to illness.

How does health stock relate to healthy days available?

Healthy days = F(H) = 365 - TL; more health stock leads to more healthy days.

What happens if health stock falls below Hmin?

The individual dies.

What is the marginal product of health?

It is greater than 0 but diminishes with each additional unit of health.

How can individuals balance income and leisure according to Grossman's model?

By choosing how many days to work versus how many days to spend on leisure activities, influenced by their daily wage rate.

What is the relationship between income and leisure in the context of work?

Income can be used to purchase health inputs or other market goods, and preferences for income and leisure are convex to the origin.

What happens to income if an individual spends all their time in leisure?

Income becomes zero, as they do not work.

What is the slope of the income-leisure line when an individual works?

The slope is equal to the daily wage (W).

What is the effect of investing in health on the number of healthy days?

Investing in health can increase the number of healthy days, but the effect is ambiguous depending on the balance of time spent investing in health and leisure.

What is the optimal combination of income and leisure represented by?

It occurs at a point where the individual's willingness to trade income for leisure equals the wage rate.

How does an increase in healthy days affect productivity?

It can increase productivity, potentially leading to a salary increase.

What does the Marginal Efficiency of Investment (MEI) measure?

MEI measures the value of additional healthy days gained from a one-unit increase in health stock.

What happens to MEI as health stock increases?

MEI decreases because the marginal product (MP) decreases as health stock increases.

What is the marginal cost (MC) of investing in health stock?

MC is the cost of raising health stock by one unit, including direct costs and opportunity costs.

What is the optimal level of health stock (H*)?

H* is where the marginal benefit of investing in health equals the marginal cost of health investment.

What effect does an increase in the depreciation rate have on health stock?

It increases the marginal cost of capital, potentially shifting the optimal health stock down.

How does age affect the depreciation rate of health stock?

The depreciation rate increases with age due to declines in strength and memory capacity.

What is the impact of higher wage rates on health investment?

Higher wage rates increase the MEI, leading individuals to invest more in health.

How does education influence health production?

More education increases the marginal product of producing health, shifting the MEI upward.

What is the effect of higher medical prices on optimal health stock?

Higher medical prices can decrease the optimal health stock due to reduced demand for medical care.

What is the substitution effect in the context of health investment?

As medical care prices increase, individuals may substitute away from higher-priced medical care towards lower-priced alternatives.

What is the relationship between MEI and wage rate?

MEI is equal to the wage rate multiplied by the marginal product (MP) of health.

What happens to the optimal health stock when the marginal cost of capital increases?

The optimal health stock may decrease as the cost of capital rises.

What is the significance of the point where MEI equals MC?

It indicates the optimal level of health investment where benefits equal costs.

How does investing in health affect future income and leisure?

Investing in health can lead to more healthy days available for work and leisure in the future.

What is the relationship between health as a consumption good and an investment good?

Health is a consumption good that directly increases utility and an investment good that increases productivity and leisure days.

What is the utility effect of having both higher income and more leisure time?

Utility is higher at the optimal leisure-income combination due to increased income and leisure.

What does a shift in the leisure income curve indicate?

It indicates changes in the trade-off between leisure and income, influenced by health investments.

What is the impact of increased sick days on productivity?

Increased sick days may decrease productivity, leading to lower income.