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Problem Set # 4
Question 1. Both country A and country B have the following production function:
Y F ( K , L) K 1/ 2 L1/ 2 .
a) What is the per-worker production function, y=f(k)?
b) Assume that neither country experiences population growth (nor technological
progress) and that 5 percent of capital depreciates each year. Assume further that
country A saves 10 percent of output each year and country B saves 20 percent of
output each year. Find the steady-state level of the following variables for each
country:
(i) Capital per worker.
(ii) Income per worker.
(iii) Consumption per worker.
c) Suppose both countries start off (period t = 1) with the same stock of capital per
worker, equal to 2. Calculate the consumption and capital stock for each country in
periods t = 1, 2 and 3. In which country consumption per capita is higher in these
periods? And in steady state?
Question 2. Consider the Solow model with production function f(k)=Ak1/2, s=0.10,
A=10, and n==1/8. Given an initial capital stock K=1,000,000 and an initial
population L=1,000,000, find:
a) The equilibrium values of capital per worker, income per worker, and consumption
per worker for periods 0, 1, 2 and 3.
b) The steady state values for the same three variables.
c) In the long run (steady state), what is the growth rate of RGDP? And the growth rate
of aggregate real Consumption?
d) In the initial periods, is the growth rate of RGDP higher of lower than in steady state?
And the growth rate of per capita RGDP?