The output of an economy is characterized by a Cobb-Douglas production function with constant return to scale and an output elasticity with respect to capital equal to 0.3. Also given are the following parameters: 30% saving rate, 5% depreciation rate, 2% population growth rate, and the technology factor is 2. a). Find the capital-labour ratio, and also the output, consumption and investment on a per capita basis in the steady state equilibrium. b). Is a government policy that raises the saving rate to 40% socially desirable? Explain your answer with reference to a comparison of this new steady state equilibrium and the initial steady state equilibrium in a) above. c). If the initial capital-labour ratio is 30, is the economy operating efficiently in the sense that welfare cannot be improved? Explain concisely. What if the initial capital-labour ratio is 15? Again explain concisely.

The output of an economy is characterized by a Cobb-Douglas production function with constant return to scale and an output elasticity with respect to capital equal to 0.3. Also given are the following parameters: 30% saving rate, 5% depreciation rate, 2% population growth rate, and the technology factor is 2. a). Find the capital-labour ratio, and also the output, consumption and investment on a per capita basis in the steady state equilibrium. b). Is a government policy that raises the saving rate to 40% socially desirable? Explain your answer with reference to a comparison of this new steady state equilibrium and the initial steady state equilibrium in a) above. c). If the initial capital-labour ratio is 30, is the economy operating efficiently in the sense that welfare cannot be improved? Explain concisely. What if the initial capital-labour ratio is 15? Again explain concisely.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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