Do the problem set without page and word limit with detail.

These questions relate to the dynamic model discussed:health today influences income today, which in turn influences health tomorrow.

(a) Describe how the relationship between health today and health tomorrow might take on an S shape. In particular, explain why health could be a) increasing over time when the initial level is very low, b) falling over time when the initial level is low, c) rising over time when the initial level is moderate, and d) falling again when the initial level is high.

(b) Explain how this relationship creates a poverty trap. That is, why is it difficult for someone with initially poor health to reach good health in the long run?

I mentioned that health is not the only mechanism through which people could end up in a poverty trap. The paper "Stochastic wealth dynamics and risk management among a poor population" by Lybbert et. al. (2004) http://www.jstor.org/stable/3590237 exploresasset-basedpoverty traps among pastoralists in Ethiopia. Read the article (you can skip sections 3-4, as they do not pertain directly to dynamic poverty traps), and answer the following questions.

2004 ] STOCHASTIC WEALTH DYNAMICS AND RISK 771 7 Sedentarisation zone OP RRRR Extensive pastoralism zone 6 ecover Costly accumulation zone 5 4 i = 10years In (Herd size, t+1) (solid) i = 1 year (dashed) 0 0 1 2 3 4 5 6 7 In (Herd size, t) Nadaraya-Watson estimates using Epanechnikov kernel with bandwidth (h = 1.5) Fig. 4. Nonparametric Estimates of Expected Herd Size Transition Functions