indifference curves and budget constraints
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5. Use consumer theory (i.e. indifference curves and budget constraints), where the usual assumptions apply, to illustrate the following:
Assume the individualâ??s utility is an increasing function of medical goods (m) and all other goods (X). That is,
Utility =U (m,x) where delta u/delta m >0, delta u/delta x >0 , and H = f(m) where delta H/deltam > 0.
That is, health or health status increases utility and health is an increasing function of medical goods.
a. Illustrate the individualâ??s utility-maximizing choice of .
b. Next, on the same graph, show the effects of the individual â??getting sick.â? When doing this, assume that the illness harms the individualâ??s ability to earn as much income as before the illness. Label the new optimum .
c. Next, suppose instead, that the individual has sick-loss insurance or sick leave from work and this would replace any income lost from missing work (do I hear a duck? Aflac!). Label this outcome .
d. This exercise is an illustration that illness has caused three potentially observable things to happen. What are they?
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Solution Summary
The black indifference curve is depicted in this case.
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