Using what you know of the Pure Investment Version of Grossman’s Model: Suppose that the following schedule shows the relationship between the Health Stock and number of healthy days in a year for an individual. The Marginal product of Health is defined as the increase in the number of healthy days from increasing Health Stock by 1 unit. Assume that the daily wage is $80.

Health Stock	Healthy Days	Marginal Product of Health	Marginal Efficiency of Capital (MEC=MPH*w)
15	328	---	---
16	344	16
17	353	9
18	357	4
19	359	2
20	360	1

1. Calculate the Marginal Efficiency of Capital

2. Based on the following information estimate the Cost of Capital to increase health stock by one unit, assuming a real interest rate of 6% and a depreciation rate of 4%.

Daily Exercise **	7 days / year
Vitamins	$280 / year
Prescription Medications	$100 / year
Physician Visits	2 / year ($250 per visit)

* Recall that the time spent exercising or going to see a physician is time that could be spent working. Don’t forget to include the wage as the opportunity cost of that time.

3. What is the Optimal Health Stock? How do we make that determination?
4. What affect would an increase in wages have on the optimal health stock? Explain.

Answer rating: 100% (QA)

ANSWER aMarginal Efficiency CostMarginal Product of HealthWage Ma... View the full answer