Question

In regards to the Solow growth model, Is this statement true of false? “If the production function exhibits diminishing marginal productivity on the range [0, ?̂] and increasing marginal productivity of the range [?̂, ∞), then there will be three steady state equilibria.” Explain your answer.

Answer 1

False.

The statement is false. This is because it is not the shape of the production function that determines the steady state equilibrium of the economy. The steady state equilibrium occurs at the point where the rate at which new capital is added is equal to the rate at which capital is depreciation or the point where savings curve or investment curve cuts the depreciation line of capital in the economy.Thus, steady state equilibrium occurs only at one point even if the production function exhibits diminishing marginal productivity on the range [0, ?̂] and increasing marginal productivity of the range [?̂, ∞).