Question

Assume that an economy is described by the Solow growth model as below: Production Function: y=50K^0.4...

Assume that an economy is described by the Solow growth model as below:

Production Function: y=50K^0.4 (LE)^0.6

Depreciation rate: S

Population growth rate: n

Technological growth rate:g

Savings rate: s

a. What is the per effective worker production function?

b. Show that the per effective worker production function derived in part a above exhibits diminishing marginal returns in capital per effective worker

C.Solve for the steady state output per effective worker as a function of s,n,g, and S

d. A developed country has a saving rate of 28 percent and a population growth rate of 1 percent per year. A less developed country has a saving rate of 10 percent and a population growth rate of 4 percent per year. In both countries, g = 0.02 and S = 0.04. Find the steady state value of output per effective worker, y^steady state for each country. Illustrate your answer with a graph showing steady state capital per effective worker, output per effective worker and consumption per effective worker.

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