L), and A is ountry A is C n of capital is its growth ra eturns to both its steady sta per capita, an
L), and A is ountry A is C n of capital is its growth ra eturns to both its steady sta per capita, an
Related questions
Question
Transcribed Image Text:SECTION B
Candidates should answer ONE question from this section
1. Suppose that the aggregate production function in Country A is as follows:
Y = AK0.3 L0.7,
where output (Y) is produced using capital (K) and labour (L), and A is total
factor productivity. The rate of growth of population (n) in country A is 0.8% per
year (n=0.008). We will assume that the rate of depreciation of capital is 15% per
period (0.15). Total factor productivity equals 20 (A=20) and its growth rate is
zero.
a) Show formally that the production displays diminishing returns to both capital
and labour. (10%)
b) Given that country A's savings rate (s) is 10% (0.100), find its steady state
capital stock per capita, income per capita, consumption per capita, and
investment per capita. (45%)
c) What is the Golden Rule level of capital per worker in this economy? Is the
economy dynamically efficient (35%)
d) Now assume that total factor productivity (A) grows at a rate of 1% per year.
What is the steady state level of capital and output per effective worker in
country A? (10%)
Image (1).jpeg
EC500 2019
Bedt (2) bew
4011
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps
