Question

Suppose that the economy’s production function is given by

Y = K^{1/3}N^{2/3}

and that both, the savings rate s and the depreciation rate δ are equal to 0.10.

**a.** What is the steady-state level of capital
per worker?

**b.** What is the steady-state level of output per
worker?

Suppose that the economy is in steady state and that, in period t the depreciation rate increases permanently from 0.10 to 0.20.

**c.** What will be the new steady-state levels of
capital per worker and output per worker?

**d.** Compute the path of capital per worker and
output per worker over the first three periods after the change in
the depreciation rate.

Answer #1

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