Technology and the Price of Health Care

Keywords

Fun with price indices. Suppose that your utility function over health care (h) and other goods (c) is given by U(h,c) and that you have a fixed income of $100. (Assume that the indifference curves of your utility function bear the usual convex shape). Each year, you choose h and c to maximize your utility subject to a budget constraint: phh + pcc = Y where, ph is the price of health care, pc is the price of other goods, and Y is your income. In year 1, the price of health care is $1, while the price of other goods is $2. At these prices, you demand 30 units of health care and 35 units of other goods. In year 2, your utility function and your income do not change, but prices do. Health care becomes more expensive at $1.50, while other goods become cheaper at $1.50. At these prices, you demand 20 units of health care