quences rons ae EXAMPLE 6.1 A PRODUCTION FUNCTION FOR HEALTH CARE ha expenditures on health Exe have increased rapidly tn many countries. This is specially true in the United States, which has been spending 15% of its GDP on health care in recent years. But other countries also devote substantial resources to health care (e.g., 11% of GDP in France and Germany and 8% of GDP in Japan and the United Kingdom). Do these increased expenditures reflect increases in output or do they reflect inefficiencies in the production process? Increased, Life Expectancy (years) Figure 6.3 shows a produc- tion function for health care in the United States.’ The vertical axis utilizes one Pos- sible measure of health out- put, the average increase in life expectancy for the popu lation. (Another measure of output might be reductions in the average numbers of heart attacks or strokes.) The hori- zontal axis measures thousands of dollars spent on health care inputs, which include expenditures on doctors, nurses, administrators, hospital equipment, and drugs. The production function represents 50 Input Expenditures per person ($000) Ficure 6.3 A PRODUCTION FUNCTION FOR HEALTH CARE Additional expenditures on health care (inputs) increase life expec: tancy (output) along the produc- tion frontier. Points A, B, and C fepresent points at which inputs are efficiently utilized, although there are diminishing returns when moving from B to C. Point D is point of input inefficiency.