Answer the following questions related to the Grossman model:
(a) Explain the difference between health being considered as (i) investment good and as (ii) consumption good.
(b) One can derive a demand function for health and for medical services from the Grossman model. Explain the differences between the two demand functions. Why does demand for health and for medical services depend on age?
(c) In richer countries, expenditure on medical services is higher. Explain this fact using the Grossman model.
Moral Hazard: Read the article by Pauly (1968) that is posted under reading assignments. Explain why on page 533 in Pauly (1968) the individual would have to pay 112.5 MC for the insurance policy.
Patient A buys 4 doctor visits at $20 a visit and 6 visits at $10 a visit. What is the price elasticity of his demand for visits? If in addition to the money price he has to spend $30 in waiting and commuting, what is the full price elasticity? The latter factors in the "total price" of a doctor visits.