EC248 Lecture Notes - Lecture 5: Capital Good, Time Preference, Marginal Utility

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6 Aug 2018

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EC248

Lesson 5: Economics of Health

Health Capital Model

➢ A capital good is a factor of production used to create goods or services

➢ A few characteristics of capital goods include:

o Investments in capital will increase the stock of capital

o They depreciate over time

▪ Health stockt = Health stockt-1 – depreciation + investment

➢ The health capital model is an economic model of the individual-level demand for and

production of health over a lifetime

Grossman’s Health Capital Model

➢ The Grossman Health Capital Model is used for analyzing both an individual’s demand

for health and their production of health

➢ The Grossman model starts off by assuming people desire health for three reasons:

o Good health provides direct benefits and enables them to undertake activities

that provide utility

o Good health enables them to work more days in the labour market and earn a

higher income, which allows them to purchase more goods and services

o Good health enables them to live longer, enjoying the benefits of their activities

and consumption for more years

➢ Mechanics of the Grossman Model

o Assumes that an individual has preferences over their health and final

consumption goods:

▪ U = U (ht, Zt)

o Three sources of benefits flow from health capital:

▪ Consumption Benefit (ht)

• Number of healthy days in period t

▪ Investment Benefit

• A person is only productive on healthy days

▪ Life Expectancy

• An individual controls life expectancy by increasing their health

stock

o The equilibrium condition illustrates people demand health for two reasons:

▪ Consumption Demand

• Other things equal, we all prefer to be healthy

▪ Investment Demand

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• Good health increases the time available to work and generate

income

➢ Investment Demand for Health

o Aging and the Optimal Level of Health

▪ As a person ages, their health generally deteriorates at a faster rate

▪ A change in the depreciation rate will affect the marginal cost of holding

health capital

o Wage Rate and the Optimal Level of Health

▪ An increase in a person’s wage increases the marginal benefit of health

capital

o Education and the Optimal Level of Health

▪ Assumes more education make people more efficient producers

▪ An increase in a person’s level of education increases the marginal

benefit of health capital

➢ Consumption Demand for Health

o Refers to the direct “consumption” benefits

o Aging and the Optimal Level of Health Capital

▪ If someone has a positive rate of time preference, this means they prefer

the present to the future

▪ People with a high rate of time preference will result in a faster decrease

in the optimal quantity of health capital

o Wage Rate and the Optimal Level of Health Capital

▪ If health production is time intensive, an increase in the wage rate will

increase the relative price of health and decrease the optimal quantity of

health capital

▪ If health production is health-care intensive, vice versa

o Education and the Optimal Level of Health Capital

▪ If there are different productivity effects across the different goods:

• If the productivity effects are EQUAL, only income effect occurs

• If productivity effects are LARGER with respect to production of

health than with production of final consumption goods, there

will BOTH be an income effect and substitution effect

• If the productivity effects are SMALLER with respect to production

of health than with production of final consumption goods, the

income and substitution effect work in OPPOSITE directions

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Document Summary

A capital good is a factor of production used to create goods or services. A few characteristics of capital goods include: Investments in capital will increase the stock of capital: they depreciate over time, health stockt = health stockt-1 depreciation + investment. The health capital model is an economic model of the individual-level demand for and production of health over a lifetime. The grossman health capital model is used fo(cid:396) a(cid:374)alyzi(cid:374)g (cid:271)oth a(cid:374) i(cid:374)di(cid:448)idual"s de(cid:373)a(cid:374)d for health and their production of health. Investment demand: good health increases the time available to work and generate. Consumption demand for health benefit of health capital: refe(cid:396)s to the di(cid:396)e(cid:272)t (cid:862)(cid:272)o(cid:374)su(cid:373)ptio(cid:374)(cid:863) (cid:271)e(cid:374)efits, aging and the optimal level of health capital. If health production is time intensive, an increase in the wage rate will increase the relative price of health and decrease the optimal quantity of health capital. If health production is health-care intensive, vice versa: education and the optimal level of health capital.

Related Questions

Fill in the blanks.

a. ___________ is the study of choice under conditions of scarcity.

b. ____________exists if we desire more of something than we can have.

c. ___________when you give up one thing to get something else.

d. ___________the value of the next-best alternative given up when that choice is made.

e. ___________a system for coordinating the production and distribution of goods and services.

f. ___________physical items produced in an economy, such as jeans, tennis rackets, popcorn, cars, and homes.

g. ______________activities produced in an economy, such as education, entertainment, and health care.

h. _____________a collection of people who share a common bond, such as those living in a city, a country, or even the entire world.

i. ____________minimal requirements of things such as food, water, and shelter that are necessary for survival.

j. ___________things that are desired but are not essential to life.

k. ______________the time and effort people contribute to the production process.

l. _____________anything long lasting that is created by humans for use in production.

m. ___________ any long-lasting good that is used to make other goods or services.

n. ______________refers to the skills and knowledge of workers.

o. ___________are the basic elements from which all goods and services are produced.

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QUESTION 25

What will happen in a market where a binding price floor is removed?

	a.	There will be upward pressure on the prices.
	b.	The price or quantity of the product sold in the legal market will not change.
	c.	There will be downward pressure on the prices.
	d.	The products sold will become scarcer.
	e.	There will be increased pressure to buy and sell the good on the black market.

1.05000 points

QUESTION 26

The local bakery calculates the price elasticity of demand for its cinnamon rolls to be â1.25. This tells them that demand is ________ and price is ________ to the buyer.

	a.	perfectly inelastic; everything
	b.	perfectly elastic; meaningless
	c.	elastic; more important than the quantity
	d.	inelastic; less important than the quantity
	e.	unitary elastic; on the same level as quantity

1.05000 points

QUESTION 27

Marginal product is the change in:

	a.	total output minus the change in input.
	b.	total output divided by the change in input.
	c.	input divided by the change in total output.
	d.	total output plus the change in input.
	e.	total output times the change in input.

1.05000 points

QUESTION 28

The government imposes a tax on each plastic bag sold such that the producer of the plastic bags must pay the tax to the government. In the market for plastic bags, the:

	a.	supply curve shifts to the left.
	b.	supply curve shifts to the right.
	c.	demand curve shifts to the right.
	d.	demand curve shifts to the left.
	e.	the supply curve and the demand curve shift to the left.

1.05000 points

QUESTION 29

Pepsi and Coke are considered substitute goods. Because of this, one would predict that, holding all else constant, if the price of Pepsi increases, we would see:

	a.	the demand curve for Pepsi shift to the right.
	b.	the demand curve for Coke shift to the right.
	c.	no change in the demand for Coke.
	d.	the demand curve for Coke shift to the left.
	e.	the demand curve for Pepsi shift to the left.

1.05000 points

QUESTION 30

The government has identified a situation where the production of a good is creating a negative externality. The government should enact legislation to require firms to internalize the externality:

	a.	as long as there are positive health benefits associated with this policy.
	b.	as long as it will not increase the price of the good being produced.
	c.	in all such cases.
	d.	if the benefits of doing so outweigh the costs.
	e.	as long as it will not create unemployment in this industry.

1.05000 points

QUESTION 31

The out-of-pocket expenses incurred in producing a good are also known as:

	a.	wages and prices.
	b.	fiduciary costs.
	c.	explicit costs.
	d.	capital costs.
	e.	implicit costs.

chocolatemule814

1. A reason why there is more competition in the restaurant industry than in the music streaming industry is that restaurants

A.unlike music streaming? companies, have to abide by government sanitation rules.

B.have to cater to a variety of consumer tastes while music streaming companies do not.

C.have more elastic demand for their product compared to music streaming companies.

D.unlike music streaming? companies, do not have significant economies of scale.

2. Why would a government use a patent to block entry to some markets if this hinders competition especially when governments generally promote? competition?

A.Patents are justified because they are an important means for creating network externalities.

B.Patents encourage firms to spend money on research necessary to create new products.

C.Politicians sometimes succumb to pressure from lobbyists to grant favors to businesses for political reasons.

D.Patents are an important source of government revenue.

3.Suppose we can divide all the goods produced by an economy into two? types: consumption goods and capital goods. Capital? goods, such as? machinery, equipment, and? computers, are goods used to produce other goods.

Suppose a technological advance occurs that affects the production of consumption goods but not capital goods.

If a technological advance occurs that affects the production of consumption goods but not capital?goods, then the production possibilities frontier will

A.remain unchanged.

B.shift outward along the consumption goods axis.

C. shift outward along the capital goods axis.

D. shift outward along both axes.

The new production possibilities frontier will indicate that with the technological? advance, more (CAPITAL GOODS /// CONSUMPTION GOODS /// OF BOTH GOODS) can be produced.

4. Market failure is best described as

A.All of the above.

B.when consumption occurs at low social benefit.

C.when the market fails to produce the efficient level of output.

D.when the market fails to produce deadweight loss.

E.when production occurs at high social cost.

The market will fail when which of the following? happen????(Check all that? apply.)

A.When property rights are incomplete.

B.When there is a market surplus.

C.When there is scarcity.

D.When it is difficult to enforce property rights.

E.When there is a market shortage

5.In which of the following market structures is price discrimination? possible?

??????a. perfect competition

??????b. monopoly

??????c. oligopoly

??????d. monopolistic competition

A.?b, c, and d only

B.?a, b,? c, and d

C.c and d only

D.b and c only

6. How do market economies ultimately determine what goods and services are? produced, how the goods and services will be? produced, and who will receive the goods and? services?

A.The government determines what goods and services are? produced, how to produce? them, and who will receive them.

B.Firms determine what goods and services are produced and how to produce? them, and markets determine who will receive them.

C.Consumers determine what goods and services are? produced, firms determine how to produce? them, and equity determines who will receive them.

D.Consumers determine what goods and services are? produced, firms determine how to produce? them, and markets determine who will receive them.

E.Firms determine what goods and services are? produced,technology determines how to produce? them, and consumers determine who will receive them.

7. For monopolistically competitive firms is it always likely in the? long-run to have? zero-economic profit?

Monopolistically competitive firms in the? long-run

A.may continue to earn profit by convincing consumers their products are differentconvincing consumers their products are different.

B.will not continue to earn profit because the cost of production will rise as new firms enter the market.

C.will not continue to earn profit because monopolistically competitive firms produce identical products.

D.will continue to earn profit due to barriers to new firms entering the market.

E.may continue to earn profit by instead beginning to produce a product identical to competitors.

8. In monopolistically competitive? markets, what is a factor under a? firm's control that determines whether it will be? successful?

A. Upper A firm's ability to differentiate its productA firm's ability to differentiate its product.

B.Consumer preferences.

C.Factors that affect all firms in a market.

D.Chance events.

E.Both a and b.

9. From the list? below, select the necessary condition in order to achieve successsful price discrimination.

A. The seller must possess market power.

B. Buyers must have identical inelastic demands.

C. Transactions costs must be zero.

D.The buyer must possess market power.??

10.Suppose Dell is currently selling 3,000,000 computers per year. However, managers at Dell are considering whether to increase production by 300,000 computers. One manager explains that after increasing production by this? amount, total profit would be? $100 million. Given this? information, should Dell increase production by 300,000 computers??

A.?Yes, because Dell would earn a profit.

B.Information about the additional cost incurred from producing 300,000additional computers is required to answer this question.

C.?No, because increasing production by 300,000 computers would decrease the price of computers.

D.Information about the additional revenue earned and the additional cost incurred from producing 300,000 additional computers is required to answer this question.

E. Information about the total revenue earned and the total cost incurred from producing 3,300,000 computers is required to answer this question.

11. The Majestic box office sells tickets for the same play at different? prices: a lower price to those who opt for the seats at the back of the theatre and a higher price for those who purchase seats in the? front, around the stage. Which of the following statements is? true?

A. This is an example of product differentiation not price discrimination.

B. The theatre practices first degree price discrimination by setting prices based on willingness to pay.

C. Charging two different prices is an effective way to avoid an excess demand for play? tickets; the higher price lowers quantity demanded to some extent.

D. Since the cost of producing the play does not change with the seating? configuration, this is evidence of price discrimination based on market segmentation.

EC248 Lecture Notes - Lecture 5: Capital Good, Time Preference, Marginal Utility

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