Suppose we are considering a hungry individual in the Grossman 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.

a Suppose the diner’s single-period utility function is as follows:

U =3Z +H 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 does this impact the diner’s choice?

c What effect does the miracle pill have on the diner’s health H? Interpret this result.

Does this mean the diner would be better off without the miracle pill?

d If the diner is instead trying to maximize his lifetime utility and not just his singleperiod 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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Table 3.2. Meal options in the Grossman model. Meal Home good (Z) Steak and eggs +7 Kale salad with broccoli -2 Entire box of cookies +10 Health (H) -2 +5 -20