Question

The Grossman model envisions consumers deciding between investments in health H and investments in home goods Z. Figure 3.15 depicts a typical consumer's production possibility frontier for health and home goods. 11

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Answer 1

Ans. a) The AB curve is upward sloping which indicates diminishing returns in Health Investment. A small investment in health increases the Non Sick time of the person and hence the person moves to an increase in investment on home goods with a diminishing increase in Investment on Health.

b) The BC curve is downward sloping , the investment in health does not increase the non sick time of the person , hence investment in health would tend to increase and investment on home goods would tend to diminish.

c) No , the consumer with typical preference not pick a point on the graph between A and B. This is because Indifference Curve is downward sloping and tangency of indifference curve with the downward sloping PPF ( optimum preference ) can occur between the point B and C , not A and B .

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