May 26th, 2023
health economics Grossman Model 2 questions
| 1. | Explain why the Grossman Model is necessary and standard utility maximisation theory cannot be used to understand the demand for health and health care.
(750 words) |
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| 2. | Consider two agents, S’chn T’gai Spock (a.k.a Spock) and Terence Stephen McQueen (a.k.a. Steve). Spock and Steve are colleagues at the Nerd Studios company and earn the same salary, that is Y=$50,000 per year. They share a passion for motocross riding in the desert.
Spock is cold and rational. Spock is perfectly able to understand and compute the risk he incurs in and behaves accordingly. Steve is a bit reckless and loves riding his motorcycle around the desert shirtless and without a helmet.
The probability of injury during a motocross ride in the desert is 10%. Falling would affect Spock’s and Steve’s income, reducing it to $40,000.
Considering the above information on Spock and Steve, answer the following questions.
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| (a) | Motivating your choice, indicate which of the three utility functions below is more appropriate to represent Spock’s and Steve’s preferences respectively.
(i) (ii) (iii) (100 words) |
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| (b) | In 2023, Nerd Studios offers to employees the opportunity to purchase a health insurance plan that would fully cover the income loss due to the potential injuries that Spock and Steve may incur whilst riding in the desert. The premium offered for such coverage is . Based on your answer in (a), discuss whether and why Spock and Steve will purchase health insurance coverage. Motivate your answer with calculations.
(150 words) |
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| (c) | Building on the material covered in class, discuss one problem that would emerge if an entire country decided to rely solely on health insurance to finance health care. You can discuss implications for financing, equity, or sustainability.
(500 words) |
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