Health Economics
14th Edition
ISBN: 9781137029966
Author: Jay Bhattacharya
Publisher: SPRINGER NATURE CUSTOMER SERVICE
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Question
Chapter 7, Problem 11AP
(a)
To determine
Describe the difference between individual J’s expected income in 2014 and expected income in 2013.
(b)
To determine
Interpret the changes in terms of the concept of price and quantity.
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Students have asked these similar questions
Suppose schmidt owns some land and is trying to decide when to sell it for a shopping center development. Her goal is to maximize her net worth, the present value of her other income stream plus the value of the land or the value of investment made with the proceeds of selling the land. The land is now worth $100k if sold. Suppose that the value of the land is expeted to increase at a rate that will slowly decrease over time as she waits.
A.) Suppose schmidt expects the land to be worth $104k next year. Should she sell it now? Why?
B.) If she expects it to be worth $110k in a year, should she sell now, Why?
C.) At what next year land value would Schmidt be indifferent between selling and holding a year?
Suppose that you discount the future hyperbolically. Assume that both B and 6
are strictly greater than zero but strictly smaller than one. At t= 0, you are given
the choice between the following three options: a (1 utile at t = 0), b (2 utiles at
t= 1), and c (3 utiles at t = 2). As a matter of fact, at t = 0 you are indifferent
between a and b and between b and c.
(a) Compute B and 6.
(b) Suppose, in addition, that at t= 0 you are indifferent between cand d (xutiles
at t = 3). What is x?
Suppose that you discount the future hyperbolically. Assume that both B and 6
are strictly greater than zero but strictly smaller than one. At t= 0, you are given
the choice between the following three options: a (1 utile at t = 0), b (2 utiles at
t = 1), and c (3 utiles at t = 2). As a matter of fact, at t = 0 you are indifferent
between a and b and between b and c.
(a) Compute B and 6.
(b) Suppose, in addition, that at t= 0 you are indifferent between cand d (x utiles
at t= 3). What is x?
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Similar questions
- Stewart will have a total wealth of $12,000 this year, if he stays healthy. Suppose Stewart has a 50% chance of staying healthy and a 50% chance of getting sick. If Stewart gets sick, then he will have to pay $8,000 for medical bills, leaving him $4,000 of total wealth. Under these conditions, Stewarts expected wealth (a.k.a. expected value of wealth) is $8,000. Based on the graph shown below, what level of wealth with certainty (i.e., wealth that Stewart is certain to have) would make Stewart equally as happy as he is when facing the 50% chance of being sick?arrow_forwardand you have a 10% chance of getting sick. Your income when sick is $0 and your income when healthy is $100. 1. Assume your utility over income is U=T ¥ 1. Graph your utility and income with income on the x-axis and utility on the y-axis. Show your income/utility when healthy and sick on the graph. 2. calculate your expected income. Show on graph. 3. calculate your expected utility. Show on graph. 1. Now you are offerred health insurance by Prof. Grossman's Totally Full and Fair Insurance Company. For a premium of $20, you will get a payout of $50 if you get sick. 1. Is the insurance company's name accurate (is this actuarially fair and full)? 2. What is the expected payout from this insurance? 3. What is the Income when sick and income when healthy under insurance? Show on your graph 4. What is the expected income and expected utility under this insurance? Show each on your graph 5. Propose a full and fair insurance given your 10% chance of getting sick and your healthy and sick…arrow_forwardIt is conceivable that the APC, APS, MPC, and MPS could simultaneously be A. APC 1.0; APS= 0; MPC= 0.15; MPS= 0.15. OB. APC= 1.0; APS= 0.1; MPC = 0.85; MPS = 0.25. OC. APC= 1.3; APS - 0.3; MPC = 0.8; MPS = 0.2. OD. APC 0.8; APS= 0.2; MPC = 1.1; MPS = 0.1.arrow_forward
- Consider an individual who faces two possible states of the world. With 20 percent probability he will face a bad state of the world, in which he must pay out $100 in health care expenses, and in the good state of the world he has no health care expenses. In either state of the world he earns income of $100 and consumes his income less his health care expenses. He is offered an opportunity to pay $20 up front (thereby reducing his consumption by $20 in either state of the world) for a health insurance contract that promises to pay him $100 to cover health care expenses in the bad state of the world. He seeks to maximize expected utility, where the utility he would derive in any state of the world is given by C0.5, where C is his consumption in that state of the world. a. Calculate the expected value of his consumption, first assuming that he does not purchase insurance and then assuming that he does. b. Calculate his expected utility, first assuming that he does not purchase insurance…arrow_forwardYou are deciding whether or not to purchase insurance. Your income is $100,000 and the chance of you getting sick is 30%. The insurance company is offering you a coinsurance rate of 0. 15 and the utility that you get from your disposable income is U = VY. If you get sick, your medical bills add up to $80,000. Assume that the insurance company charges the actuarially fair premium, and assume that you would purchase the same amount of medical care whether you are insured or not (i. e. M ^ (i) = M ^ u = M ^ *). Economic theory predicts that you will purchase insurance if the expected gain in utility from receiving the insurance payout when you are sick is greater than the expected loss in utility from paying the premium and remaining healthy. Using an expected utility diagram, show your decision process regarding whether to buy insurance or not. then show on the diagram the following: Disposable income if you remain healthy and do not purchase insurance Disposable income if you are…arrow_forwardConsumers deposit their total saving, equaling the value of 1, at the bank at t = 0. The bank invests all deposit in an illiquid asset, yielding R = 1.5 inperiod 2 and has a liquidation value of 1 at period 1. Consumers have the probability of 25 percent of being impatient and consume in period 1. Theremaining patient consumers want to consume in period 2. The bank offers r(1) = 1.10 and r(2) = 1.20 as payment to consumers who withdraw inperiod 1 and period 2 respectively. Suppose that consumers believe at period 1 that 70 percent of the consumers withdraw their deposits at period 1, will this believe trigger a bankrun?arrow_forward
- Suppose a consumer faces uncertainty over his income in period and he assumes following utility function max E {u(ci)+ Bu(c2)} subject to G =1-a,;c, = W, +(1+r)a, where income in period 2, w, is uncertain. w, is subject to two states with probability of 1+ɛ with probability p and 1-ɛ with probability 1-p. Given these conditions, derive the Euler condition under uncertainty.arrow_forwardIn 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).arrow_forwardJose and Amy recently got married and just bought their first home for $500,000. They both have to work to maintain their $400,000 mortgage. Jose earns $35,000 per year, and Amy earns $45,000 per year. Based on the income multiplier estimation, how much life insurance should they have?arrow_forward
- Consider the two-period household-maximization model discussed inclass. The model is modified in order to look at applications including credit constraints,interest-rate markups, and taxation. A representative household lives for two periods andmaximizes utility of consumption in period 1 and in period 2. The utility is represented bylog(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written asmax{log c1 + log c2}c1 + a1 = y1 − τ1 + (1 + r)a0c2 = y2 − τ2 + (1 + r)a1where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the twoperiods, and a0 and a1 denote the assets of the households in each period. a0 is exogenouslygiven. Assume the interest rate r = 0, and the government can borrow or save at the sameinterest rate so that its present-value budget constraint is given byg1 + g2 = τ1 + τ2where g1 and g2 are exogenous government expenditures in the two…arrow_forward1- A consumer who starts (i.e. has an endowment) at point B, and has preferences shown by IC1, will want to borrow. Select one: True False 2-Assuming a mix of present and future consumption is preferred, ANY consumer who starts (i.e. has an endowment) at point A will gain utility from a rise in interest rates. Select one: True False 3-A consumer who starts at point B will want to borrow, but as little as possible in order to minimise the cost of interest. Select one: True False 4-If a consumer starts at point A, and then receives extra income in the present, this would appear as an outward shift of the budget constraint. Select one: True Falsearrow_forwardSuppose Tim is deciding how much to invest in his health, and his Marginal Efficiency of Investment (MEI) curve for health inputs (H = hours spent exercising per week) is given by the following equation: H = 40 – 100(r+δ), where r is discount rate and δ is the rate of health capital depreciation. If Tim’s discount rate is 8% (or 0.08), and his rate of depreciation of health capital is 4% (or 0.04), how many hours per week will he spend exercising? Show your work. Now, suppose Tim gets a large raise at work, such that his hourly wage doubles. Would we expect his optimal level of health investment to change as a result? If so, how and why? Explain your answer using the theoretical framework.arrow_forward
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