Question

16 Nutritional economics. Suppose we are considering a hungry individual in the Gross man model deciding what to have for dinner. His options are listed in Table 3.2. Each dish has an effect on the level of the home good Z and health H. Table 3.2. Meal options in the Grossman model. Meal Steak and eggs Kale salad with broccoli Entire box of cookies Home good (Z) +7 2 +10 Health (H) 2 20 a Suppose the diner's single-period utility function is as follows: If the diner is trying to maximize his single-period utility, and he can only select one item from Table 3.2, which meal would he choose'? b A miracle pill is discovered that halves the negative health impact of cookies. How c What effect does the miracle pill have on the diner's health H? Interpret this result. d If the diner is instead trying to maximize his lifetime utility and not just his single- does this impact the diner's choice? Does this mean the diner would be better off without the miracle pill? period utility, how might your answer to Exercise 16(a) change? Is he likely to value Z or H more in the lifetime context than the single-period context? Explain your answer, and be sure to invoke the concept of a capital good

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Answer 1

A) putting the value of z and h in the utility function "U = 3Z + H"

i) Steak and eggs:

U = 3x7 -2 = 19

ii) Kale salad with broccoli

U = 3x -2 + 5 = -1

iii) Entire box of cookies

U = 3x10 -20 = 10

Since Steak and eggs maximises hus single period utility hence he will choose this

B) Since the miracle pill halves the negative impact of cookies on his health, so the new utility will be

U = 3x10 - (1/2) 20

U = 20

Which is maximum, so he will choose a box of cookies in a single period utility

C) The miracle pill will halve the negative impact of cookies on diner's health. i.e it reduces the decreasing utility of health for a box of cookies from -20 to -10.

No diner would not have been better off without the miracle pill. Health when viewed as a capital will depletes as age increase. Since the pill will decrese the depletion rate to half in case he chooses to have a box of cookies some day, so in a long run the pill improved the health.

D) Health is viewed as a sort of capital. The model acknowledges that health is both a consumption good that yields direct satisfaction and utility, and an investment good, which yields satisfaction to consumers indirectly through increased productivity, fewer sick days, and higher wages. Investment in health is costly as consumers must trade off time and resources devoted to health, such as exercising at a local gym, against other goals.

When seen for a life time utility health is considered an important factor, while with the pill "a box of cookies" decreses the negative health effects and increse the utility, but still the negative impact of cookies is more than that of "Steak and eggs" and the utility difference between "entire box of cookies" and "steak and eggs" is not much. So in long term he will choose "steak and eggs" over box of cookies.