Transcript
Chapter 7 – Demand for Health Capital
Key Ideas
We value health – we buy health-related goods in order to produce that health.
Like other capital goods, we give up current consumption to get health investment.
The new section on obesity gives a particular example relating to consumption and investment. Undertaking a diet to lose weight can hardly be considered an increase in consumption, but it is definitely an investment in health capital.
Like other forms of investment the amount of health investment is related to the return (a function of age, education, wage rate), relative to the cost (related to the cost of capital and depreciation rates).
Teaching Tips
Many students can relate health investment to investment in a car. Owning a car entails an opportunity cost of capital. Over time the car starts to depreciate, and one has to decide how much to spend to keep it up.
Another example of investment involves personal computers. Students know that a five year old personal computer has essentially no economic value, but they don’t always recognize that it relates to economic depreciation.
Have students enumerate the “time costs” in producing health. Some relate to health-producing activities such as exercise. Others may relate to travel time and waiting time in doctors’ appointments. Goodman, Stano and Tilford (1999) provide a detailed geometric exposition of time costs.
One can speak of the elderly, showing how their expenditures on health care may increase, because the cost of their health investment has risen due to depreciation.
Instructors must be sensitive with this example, but certainly, the “right to die” relates to a decision to let one’s health capital fall to Hmin, or 0. Some students may wish to share family experiences.
Chapter 7 – Demand for Health Capital - Multiple Choice
Health can be described as a capital good because:
we forego current consumption to improve health, which lasts into the future.
we use capital goods and technology to produce it.
we can increase it or let it depreciate through investment.
Answers (a) and (c) are correct.*
Time is an important factor in health production because
all consumers could work and earn more money if they did not spend time producing health.
many health-producing activities involve time-spending activities such as traveling to the provider.
with only 24 hours in a day, time spent producing health must come from some other activity.
Answers (b) and (c) are correct.*
In the middle box of Figure 7-1, health capital for a college student in the fourth time period (year) may fall because she:
fell ill that year.*
went on a diet that year and lost 20 pounds.
enrolled in a health club.
bought health insurance.
In Figure 7-2 of the text, the amount of work is measured by .
0A.
0Y1.
0Y2.
AS.*
In Figure 7-2, if the wage rate decreases, line segment SV
rotates clockwise around S.
rotates counterclockwise around S.*
shifts upward.
shifts downward.
In Figure 7-2, if increased health investment makes someone more productive in work, line segment SV
rotates clockwise around S.*
rotates counterclockwise around S.
shifts upward.
shifts downward.
In Figure 7-2, an increase in property taxes (having nothing to do with labor or leisure) unambiguously leads to:
more leisure
more leisure and more income
lower income
less leisure*
In Figure 7-2, a gift from your rich uncle (having nothing to do with labor or leisure) unambiguously leads to:
lower income
less leisure
more leisure*
more leisure and more income
People do not spend all of their time producing health because:
they do not desire additional health.
there is decreasing marginal productivity of time spent in producing health.
activities other than health production increase their utility.
answers (b) and (c) are correct.*
Improved health increases one’s well-being because one
has more healthy time.
can earn more money per hour while working.
can work less.
Answers (a) and (b) are correct.*
In Figure 7-5, assume that Ed places no intrinsic value on health (what does that mean about the indifference curve?). Therefore, increased productivity in the production of health investment:
decreases the amount of health investment.
has no impact on the amount of health investment.
increases the amount of health investment by a small amount.*
increases the amount of health investment by a large amount.
At ____ interest rates, the opportunity cost of capital ____:
lower; increases.
higher; increases.*
zero; is zero.
zero; is infinite..
At a 10% interest rate, ignoring depreciation, over a two year period a $100,000 investment must earn at least ____ to be economically viable.
$5,000.
$16,000.
$21,000.*
$32,000.
At a 6% interest rate, ignoring depreciation, over a three year period a $100,000 investment must earn at least ____ to be economically viable.
$7,000.
$19,000. *
$31,000.
$56,000.
Assume that a machine has a useful life of 8 years, and it loses its value in a “straight line” (i.e. one-eight of the original value per year). At a 10% interest rate, and including depreciation in the calculation, over a two year period a $100,000 investment must earn at least approximately ____ to be economically viable.
20,000.
30,000.
40,000.
50,000.*
Depreciation represents a cost of capital because:
accountants calculate it.
it influences taxes.
it uses up part of the capital good.*
it affects the interest rate.
Personal computers are likely to have a _______ rate of depreciation than health capital because of __________.
lower; improving technology makes replacements more productive.
higher; improving technology makes replacements more productive.*
lower; more favorable tax treatment.
higher; longer useful life.
If we start at I0, and the cost of capital rises from C0 to C1, we move from:
A to C.*
C to A.
A to E.
B to E.
Reduced returns on financial investments are likely to move an investor from:
A to E.
B to A.
A to C.
C to A.*
If we start at I0, through point A, and the cost of capital rises from C0 so that we move to point C, the total investment costs:
rise.
fall.
stay the same.
may rise or fall depending on the elasticity of demand for health investment.*
(Difficult) On the diagram suppose C0 = 0.10 and C1 = 0.20. If I0 = 2000, and I1 = 1600, then an increase in the cost of capital from 0.10 to 0.20 will:
raise health investment expenditures from 200 to 320.*
raise health investment expenditures from 10 to 20.
lower health investment expenditures from 20 to 16.
lower health investment expenditures from 2000 to 1600.
Increased levels of education will move the person from:
A to E.
A to C.
A to B.*
B to C.
As people age, their optimal health stock ________ because _________.
increases; people are ill more often.
increases; people are using more care.
decreases; cost of capital increases, and remaining life span decreases.*
decreases; cost of capital decreases, and remaining life span increases.
Rational addition models explain smoking behavior because:
current consumption of cigarettes affects future pleasure.
people do not make long term decisions regarding addictive behaviors.
smoking cigarettes can reduce health stock.
answers (a) and (c) are correct.*
Increased wage rates imply ________ but also ______ time costs. Thus their impacts on health investment demand are ambiguous.
Higher income; lower.
Lower income; lower.
Higher income; higher.*
Lower income; higher.
The BMI helps to measure obesity. All else equal, an increase in the person’s height ___ the BMI because _____.
raises; taller people are fatter.
lowers; holding weight constant, BMI must fall.*
raises; holding weight constant, BMI must rise.
stays constant; weight has not changed.
A BMI equal to 32 indicates that the individual is ____.
underweight.
normal weight.
overweight.
obese.*
In the economic model of obesity (equation 7.5) two people who eat the same amounts of junk food and health meals, may gain different amounts of weight due to differences in ______.
exercise.
basil metabolic rate.
education.
Answers a and b are correct.*
Table 7-3 shows the following changes in food consumption from the mid-1970s to the mid-1990s.
Women’s calorie intake remained unchanged, but women had higher amounts of calories in snacks.
Women’s calorie intake rose, but the amounts in snacks remained unchanged.
Men’s calorie intake rose, and most of the rise could be attributed to increased snacks.*
Men’s calorie intake rose as did their number of calories per meal.
Table 7-4 shows that in a thirty year period, time costs for meal preparation and clean-up for working married females:
fell by over 50 percent.*
fell by about 10 percent.
increased by about 20 percent.
did not change.
