Question
The healthier an individual is the fewer days they are sick. The table below provides the relationship between the individuals health stock and sick days:
The healthier an individual is the fewer days they are sick. The table below provides the relationship between the individuals health stock and sick days:
Health Stock | Sick Days | Health Stock | Sick Days |
3 | 100 | 9 | 13 |
4 | 70 | 10 | 9 |
5 | 50 | 11 | 6 |
6 | 35 | 12 | 4 |
7 | 26 | 13 | 3 |
8 | 19 |
|
|
The individual works and has a daily wage rate=$200. Moreover, the total cost (including both direct and opportunity costs) for the individual to increase his health stock by 1 unit is $4,000. If the real interest rate is 7% and the persons health stock depreciates at a rate of 8% per year:
a) What is the optimal stock of health for the person to have from a pure investment standpoint?
b) Show graphically how the optimal stock of health was found.
c) Suppose the person is diagnosed with a chronic disease and the persons health depreciates at a faster rate of 13% per year. What is the persons optimal stock of health?
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