(a) Characterize the initial steady state equilibrium in both countries, graphically and in algebraic expressions. Which country is initially better off? (b) Demonstrate graphically what happens to both economies after the hurricane. What are the changes to total output, total capital, income per capita, capital per capita, consumption, investment, the rental rate of capital, and wages? Trace out dynamics and explain the effects. Be sure to clearly explain the timing of the hurricane and the change in savings/depreciation. (c) Which economy has a higher capital stock per effective unit of labor? Which economy has a higher total output? Which economy has a higher capital stock per worker? (d) Use your answers above to report on the effects of the hurricane to a government agency deciding whether to give foreign aid to one of the Isle of Sand or the Glass Islands. Which economy should the foreign government help? How should the foreign government help that economy?

(a) Characterize the initial steady state equilibrium in both countries, graphically and in algebraic expressions. Which country is initially better off? (b) Demonstrate graphically what happens to both economies after the hurricane. What are the changes to total output, total capital, income per capita, capital per capita, consumption, investment, the rental rate of capital, and wages? Trace out dynamics and explain the effects. Be sure to clearly explain the timing of the hurricane and the change in savings/depreciation. (c) Which economy has a higher capital stock per effective unit of labor? Which economy has a higher total output? Which economy has a higher capital stock per worker? (d) Use your answers above to report on the effects of the hurricane to a government agency deciding whether to give foreign aid to one of the Isle of Sand or the Glass Islands. Which economy should the foreign government help? How should the foreign government help that economy?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Island Neighbors: Consider two remote, but neighborly, nations, the Isle of Sand
and the Glass Islands. Both economies have similar demographics and technology (n, A, ZŁ, and z),
but the Isle of Sand has a larger initial population N and a higher level of depreciation 8. Both
economics can be represented by Cobb Douglas production functions, and their initial savings rate s
is the same. Consider the following situation: Hurricane winds visit the virus, and wipe out half of
the capital stock on both the Island of Sand and the Glass Islands. As a result, people on the Island
of Sand start saving at twice their initial rate. People on the Glass Islands invent a new way to store
their capital, so their depreciation decreases.
(a) Characterize the initial steady state equilibrium in both countries, graphically and in algebraic
expressions. Which country is initially better off?
(b) Demonstrate graphically what happens to both economies after the hurricane. What are the
changes to total output, total capital, income per capita, capital per capita, consumption,
investment, the rental rate of capital, and wages? Trace out dynamics and explain the effects.
Be sure to clearly explain the timing of the hurricane and the change in savings/depreciation.
(c) Which economy has a higher capital stock per effective unit of labor? Which economy has a
higher total output? Which economy has a higher capital stock per worker?
(d) Use your answers above to report on the effects of the hurricane to a government agency deciding
whether to give foreign aid to one of the Isle of Sand or the Glass Islands. Which economy should
the foreign government help? How should the foreign government help that economy?

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Step 3: Explain the Effects of the Hurricane:

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