(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 116

CHAPTER • Consumer Behavior 91 car, or additional medical care that might extend your life by a year? Many would choose the extra health care The preferences for health care are illustrated in Figure 3.16, which shows a series of indifference curves and budget lines that characterize the tradeoff between consumption of health care (H) versus other goods (O) Indifference curve U1 applies to a consumer with low income; the consumer’s budget line is tangent at point A, so that the consumption of health care and consumption of other goods that maximize the consumer’s satisfaction are H1 and O1 Indifference curve U2 yields a greater amount of satisfaction, but is only feasible for a consumer with higher income In this case utility is maximized at point B Curve U3 applies to a high-income consumer, and implies less willingness to give up health care for other goods Moving from point B to point C, the consumer’s consumption of health care increases considerably (from H2 to H3), while her consumption of other goods increases only modestly (from O2 to O3) Does Figure 3.16 correctly characterize the preferences of consumers? At least one recent statistical study indicates that it does 10 So does common sense If your income were high enough so that you could have most of the things you wanted, would you prefer to spend additional income on life-extending health care or on another car? F IGURE 3.16 CONSUMER PREFERENCES FOR HEALTH CARE VERSUS OTHER GOODS Health Care C H3 B H2 H1 U3 A U2 U1 O1 10 O2 O3 Other Goods These indifference curves show the trade-off between consumption of health care (H) versus other goods (O) Curve U1 applies to a consumer with low income; given the consumer’s budget constraint, satisfaction is maximized at point A As income increases the budget line shifts to the right, and curve U2 becomes feasible The consumer moves to point B, with greater consumption of both health care and other goods Curve U3 applies to a high-income consumer, and implies less willingness to give up health care for other goods Moving from point B to point C, the consumer’s consumption of health care increases considerably (from H2 to H3), while her consumption of other goods increases only modestly (from O2 to O3) See the interesting article by Robert E Hall and Charles I Jones, “The Value of Life and the Rise in Health Spending,” Quarterly Journal of Economics, February 2007, pp 39–72 The authors explain that the optimal composition of total spending shifts toward health as income increases They predict that the optimal heath share of spending is likely to exceed 30 percent by 2050