In the health capital model developed by Grossman (1972): a. What is meant by th

Question

In the health capital model developed by Grossman (1972):

a.   What is meant by the investment demand for health?

b.   Lucky Pierre has just won a major lottery. He has decided to retire at the end of the month, coincidentally on his 50th birthday. From the standpoint of his investment demand for health, describe the expected profile of his (i) health investments and (ii) health capital stock that we should expect for Pierre over the remainder of his life?

c.   What is meant by the consumption demand for health?

d.   If we consider both the investment demand and the consumption demand for health, what profile do you expect Pierre’s health capital stock follow over his retirement years (until death)?

Explanation / Answer

According to Grossman, Health can be treated both as a consumption and an investment good.

consumption: health makes people feel better

investment: it increases the number of healthy days to work and to earn income

I = I(M,TH)

I: health investment

M: market health inputs (medical services, drugs, . . . )

TH: time spent improving health

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