1. The Grossman Model
   1. Draw a graph illustrating the labor-leisure tradeoff in the Grossman Model. Your axes should both be in terms of time units. Illustrate on your graph what happens when the individual acquires diabetes. Label all relevant intersection points, axes, and clearly denote where the individual is after the negative health shock and time lost to diabetes care.

1. Now draw the Grossman production possibilities frontier (with utility curve) showing the amount of home good (Z) and health (H) the individual will consume. Be sure to label which point is before and which point is after acquiring diabetes.

1. Now illustrate the health shock on a graph with marginal efficiency of capital. Clearly label the point before and after acquiring diabetes. Note your shock with a directional arrow.

1. Demand Elasticity
   1. Your clinic has conducted market research and surveyed patients in two neighboring communities. You find community members in Arkham City (where your clinic is located) pay $55 per procedure after insurance and in Rapture City the average post-insurance price is $40 per procedure. Average, annual, per capita procedures are 0.5 in Arkham and 0.7 in Rapture. Calculate the arc elasticity of demand using these figures.

1. Your clinic manager suggests raising post-insurance procedure prices by 5% to cover a 5% increase in building costs. Will this strategy work? Explain.

1. If you follow your clinic manager's advice and raise prices by 5% how many procedures would your clinic expect to do on average?

1. While some of your patients do come from Rapture, many of them go to other, cheaper clinics in the region. Your are concerned that the estimates of demand may be biased. What might be a source of bias?

1. Given the source of bias you stated in Part D, would the calculation in Part A be too elastic or not elastic enough? Why?