ECO 2143 Suggested Problems # 3 Solution

1. Consider the following production function: Y = AK ( hL )1 , where h is the constant level of

human capital per worker. The rate of investment in physical capital is s and the rate of
depreciation is . There is no population growth.
a. Derive an expression for the marginal product of physical capital.

=
Y AK
=
h1 AK L1
( hL )
1

=
MPK

Y
= h1 A K 1 L1
K
K 1
= h1 A 1
L
1

K
= h A
L
1
= h A k 1
1

b. How does the level of human capital affects the marginal product of physical capital?
The level of human capital increases the marginal product of physical capital. The higher is
the level of skills of the work force, the higher is the return on an additional unit of physical
capital.

c. Find expressions for physical capital per worker and production per worker in steady-state.
Start with the production function, expressed in terms of quantities per worker:
y = h1 Ak

In steady-state :
sy
=

( + n ) k

Using the production function, we have:

sh1 Ak=

( + n ) k

Solving for k:

( + n ) k 1

sh1 =
A
k 1 =

h1 As
+n
1 1

1 1

h1 As
As
=
k =
h

+ n
+n
*

Substituting the expression for the stock of capital per worker in steady-state in the production
function:
y* = h1 A ( k * )

h1 As 1 1
1
= h A

+ n

=h

=h

h AA

1 1

y = hA
*

h1 As
A

+n

+ n
1

+ n

d. How does human capital affects the level of physical capital per worker in steady-state?
Physical capital per worker and production per worker in steady-state are proportional to the
level of human capital per worker.