(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 236

CHAPTER 6 • Production 211

we can see in Example 6.1, the failure to account for long-run improvements in
technology led British economist Thomas Malthus wrongly to predict dire consequences from continued population growth.

EX AMPLE 6. 1 A PRODUCTION FUNCTION FOR HEALTH CARE
Expenditures on health
care have increased rapidly
in many countries. This is
especially true in the United
States, which has been
spending 15% of its GDP on
health care in recent years.
But other countries also
devote substantial resources
to health care (e.g., 11% of
GDP in France and Germany
and 8% of GDP in Japan and the United Kingdom).
Do these increased expenditures reflect increases
in output or do they reflect inefficiencies in the
production process?

Figure 6.3 shows a production function for health care
in the United States. 5 The
vertical axis utilizes one possible measure of health output, the average increase in
life expectancy for the population. (Another measure of
output might be reductions in
the average numbers of heart
attacks or strokes.) The horizontal axis measures thousands of dollars spent on
health care inputs, which include expenditures on
doctors, nurses, administrators, hospital equipment,

and drugs. The production function represents

C
Increased
Life
Expectancy
(years)

8
B
7

F IGURE 6.3

D

6

A PRODUCTION FUNCTION
FOR HEALTH CARE
Additional expenditures on health
care (inputs) increase life expectancy (output) along the production frontier. Points A, B, and C
represent points at which inputs
are efficiently utilized, although
there are diminishing returns when
moving from B to C. Point D is a
point of input inefficiency.

A

4

0

10

30

50
Input Expenditures per person ($000)

5

This example is based on Alan M. Garber and Jonathan Skinner, “Is American Health Care Uniquely
Inefficient?” Journal of Economic Perspectives, Vol. 22, No. 4 (Fall 2008): 27–50.