1. The Grossman model uses the economic concept of a production function. Before you dive deeply into the Grossman model though, I want you to think more generally about the concept of a production function as it relates to health status. A production function describes the relationship between inputs and outputs for a production process. For a business, the inputs are labor, capital, raw materials, etc. and the output is the finished product. The production function is often describe mathematically using an equation like the one below: Y = K¹/3L2/3 Where Y is the amount of output from using K units of capital and L units of labor. a. Now consider a production function for something very different: in the United States. That is, consider a average life expectancy production function where Y = life expectancy measured in years. What do you think are the primary inputs? That is, what are the variables on the right-hand side of the equation? Hint: think broad categories...and there are more than two b. Notice the exponents in the equation above. The bigger the exponent, the larger the role the variable plays in the production process. In the equation above, labor is more important than capital for producing output since 2/3 is bigger than 1/3. In your estimation, which variables that you named in part a would have the largest exponents in the production of life expectancy? Why? c. Suppose that you keep increasing one input that you specified in part a, while keep the amount of all others constant. What would expect to happen to life expectancy as you add more and more of a single input? Does this idea help explain why the US spends more on health care than other countries but does not achieve longer life spans?
1. The Grossman model uses the economic concept of a production function. Before you dive deeply into the Grossman model though, I want you to think more generally about the concept of a production function as it relates to health status. A production function describes the relationship between inputs and outputs for a production process. For a business, the inputs are labor, capital, raw materials, etc. and the output is the finished product. The production function is often describe mathematically using an equation like the one below: Y = K¹/3L2/3 Where Y is the amount of output from using K units of capital and L units of labor. a. Now consider a production function for something very different: in the United States. That is, consider a average life expectancy production function where Y = life expectancy measured in years. What do you think are the primary inputs? That is, what are the variables on the right-hand side of the equation? Hint: think broad categories...and there are more than two b. Notice the exponents in the equation above. The bigger the exponent, the larger the role the variable plays in the production process. In the equation above, labor is more important than capital for producing output since 2/3 is bigger than 1/3. In your estimation, which variables that you named in part a would have the largest exponents in the production of life expectancy? Why? c. Suppose that you keep increasing one input that you specified in part a, while keep the amount of all others constant. What would expect to happen to life expectancy as you add more and more of a single input? Does this idea help explain why the US spends more on health care than other countries but does not achieve longer life spans?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Transcribed Image Text:1. The Grossman model uses the economic concept of a production function. Before
you dive deeply into the Grossman model though, I want you to think more
generally about the concept of a production function as it relates to health
status. A production function describes the relationship between inputs and
outputs for a production process. For a business, the inputs are labor, capital,
raw materials, etc. and the output is the finished product. The production
function is often describe mathematically using an equation like the one below:
Y = K¹/3L2/3
Where Y is the amount of output from using K units of capital and L units of
labor.
a. Now consider a production function for something very different:
in the United States. That is, consider a
average life expectancy
production function where Y = life expectancy measured in years. What
do you think are the primary inputs? That is, what are the variables on
the right-hand side of the equation? Hint: think broad categories...and
there are more than two
b. Notice the exponents in the equation above. The bigger the exponent,
the larger the role the variable plays in the production process. In the
equation above, labor is more important than capital for producing
output since 2/3 is bigger than 1/3. In your estimation, which variables
that you named in part a would have the largest exponents in the
production of life expectancy? Why?
c. Suppose that you keep increasing one input that you specified in part a,
while keep the amount of all others constant. What would expect to
happen to life expectancy as you add more and more of a single input?
Does this idea help explain why the US spends more on health care than
other countries but does not achieve longer life spans?
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