Reference no: EM133130538

Alreena has been diagnosed with Major Depression Disorder and must decide whether to seek treatment or not. There are two periods: period 0 (today/present) and period 1 (the "future"). Alreena's discount factor is β= 0.5. Therefore, Alreena's intertemporal utility is u0+ β u1. Suppose that Alreena's utility is a function of her consumption of a bundle of goods, C, which she buys with her disposable income, I. Alreena's period t utility function is u(Ct) =sqrt(Ct). Alreena's disposable income when she is depressed in 100USD.

1. Figure out the cost of treatment, K, at which Alreena is indifferent between seeking metal health care or not, under the assumption that, if Alreena gets treated, she becomes more productive and her disposable income increases by 21USD.

2. Suppose that, if she sought treatment at time 0, the following changes would occur: (i) her disposable income in period 1 increases by 21USD; (ii) her life enjoyment in period 1 increases and, therefore, she derives more happiness for each level of consumption: her utility function becomes u(C1) =2sqrt(C1); (iii) her interest in the future increases; therefore, her discount factor becomes β= 0.9. If Alreena knew it, how much would she be willing to spend to get treatment in period 0?

3. Use the previous example to explain how lack of knowledge of the symptoms of depression may lead to undertreatment

4. Use the previous example to explain how depression may lead to a poverty by reducing investment.