Question

14 True or false? According to the Grossman model, if a new drug were discovered that eliminated the steady deterioration of health that accompanies aging - but does not eliminate sudden events like heart attacks or being hit by a bus - then the demand for jelly donuts, french fries, and physical activity in the presence of buses would decline. Justify your answer

Answer 1

False.

Demand for these things will rise, not fall.

As per Grossman Model,

Optimal health status is attained when marginal cost of health capital (MC) equals marginal benefit (MB):

MC = MB.

MC is the sum of depreciation rate of health (d) and interest rate that consumer is charged (r):

MC = d + r

With increasing age, "d" increases because health depreciates faster. As d decreases, MC decreases and MB also declines. But here, if d is zero, then MC = r.

So, marginal cost declines and demand for such products will increase.