Suppose an economy is described by the following production function:
Y = K1/2 (EL)1/2
The savings rate in the economy is 0.40, population is growing at a rate of 0.01, technological progress is growing at a rate of 0.01, and the depreciation rate is 0.02.
What is the steady state level of investment per effective worker?
Production function is given by :
Y = K1/2 (EL)1/2 => (K1/2 (EL)1/2)/(EL) = (K/(EL))1/2
=> y = k1/2 where y = Y/(EL) and k = K/(EL)
Steady state occurs when Change in k = sy - (d + n + g)k = 0
where, s = savings rate = 0.40, n = population growth rate = 0.01, g = technological progress growth rate = 0.01, and d = depreciation rate = 0.02.
Thus at steady state, 0.4k1/2 - (0.02 + 0.01 + 0.01)k = 0 => k = 100
=> Investment per worker = sy = 0.4*1001/2 = 4
Hence, Investment per worker = 4
Get Answers For Free
Most questions answered within 1 hours.