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?
The black indifference curve is depicted in this case.
Budget Constraint/Indifference Curve
At commodity bundle A, which consists of only apples and oranges, Annette's marginal utility per dollar spent on apples is 10 and her marginal utility per dollar spent on oranges is 8. Diagram a representative budget constraint and indifference curve that passes through bundle A given Annette's budget is exhausted at bundle A. Is Annette maximizing utility? Why or why not? If she is not, what could she do to increase her level of satisfaction?View Full Posting Details