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Notes Ch07 D Capital

Notes Ch07 D Capital

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Published by Katherine Sauer

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Published by: Katherine Sauer on Jan 04, 2012
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 Dr. Katie Sauer  Health Economics
Demand for Health CapitalChapter 7Overview:I.The Demand for HealthII. Labor–Leisure Trade-OffsIII. The Investment/Consumption Aspects of HealthIV.The Cost of CapitalV.The Demand for Health CapitalVI.Empirical Analyses ____________________________________________________________________ I. Demand for HealthA. The Consumer as a Health Producer 1. People ultimately want health, they demand medical care inputs to produce it.2. Consumers are active producers of their health.combine:-time devoted to health-improving efforts-purchased medical inputs3. Health lasts for more than one period.- does not depreciate instantly (can analyze like a capital good)4. Health can be treated both as a consumption good and an investment good.As a consumption good, health is desired because it makes people feel better.As an investment good, health is desired because it increases the number of healthydays available to work and to earn income.B. A Model of Time Spent Producing Health
Suppose we divide your time into 3 categories:work leisureimproving healthThe model:
 I = I(M,T 
 )B = B(X,
is investment in health
is leisure “goods” produced by the
is market health inputsindividual
is time used in the production
is market purchased goodsof health
is time used producing leisure“goods”Total Time = time on improving health+ time producing leisure “goods”+ time lost to illness+ time working T = T
+ T
+ T
+ T
II. Labor-Leisure Trade-Off ModelIII. The Investment and Consumption Aspects of HealthA. The Production of Healthy Days
When you spend all your time working,your income is at its maximum and youspend 0 hours on leisure.When you spend no time working, you canachieve your maximum leisure time:365 - T
- T
- 0
Consumers have preferences regarding incomeand leisure.Consumers prefer to have both more incomeand more leisure.The optimal income-leisure combination for this consumer is Y*, B*.
Over time investments in health reduce timelost to illness, T
, and thereby increaseleisure time.A higher level of utility can be achieved.
B. Production of Home and Health GoodsIV. The Cost of CapitalSuppose that an X-ray machine costs $200,000, and that its price does not change over time.Suppose that the annual income attributable to the use of the X-ray machine is $40,000.Is purchasing the machine a good investment?Consider the alternative: Instead of purchasing the X-ray machine, the clinic could have put the $200,000 in a savings account, at 5 percent interest, yielding the following:200,000 x 1.05 = 210,000 at the end of Year 1210,000 x 1.05 = 220,500 at the end of Year 2220,500 x 1.05 = 231,525 at the end of Year 3231,525 x 1.05 = 243,101 at the end of Year 4243,101 x 1.05 = 255,256 at the end of Year 5
This illustrates the production of healthydays using a single input, health stock.If health stock falls below H
, it indicatesdeath.The shape of the function indicatesdiminishing marginal returns.AECD represents production possibilities.If health is an investment good only,indifference curves look like U
.- no intrinsic value of healthIf health is a consumption good thenindifference curves look like U
.- likes feeling good

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