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Consider the two economies, The Republic of Tesla and The Union of Edison. The Republic of...

Consider the two economies, The Republic of Tesla and The Union of Edison. The Republic of Tesla and The Union of Edison have the same depreciation rates and populations, but differ on other variables.

To be specific The Republic of Tesla has the following production function, Y = 3 K, and a savings rate of .25.

On the other hand The Union of Edison has the following production function, Y = 1.5 K, and a savings rate of .5.

Just so we are clear, The Republic of Tesla has more productivity (technology) than The Union of Edison, but the The Union of Edison saves more.

Which country would you rather live in and why? (Note: Select the choice that has the correct answer and reasoning. You have to get both).

A) The Republic of Tesla; Less savings means more consuption, and this higher standard of living.

B)The Republic of Tesla; Tech leads to higher GDP per capita in the long run.

C)The Union of Edison; Increased savings will lead to lower government debt.

D) The Union of Edison; High savings will result in higher GDP per capita in the short and long run.

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Answer #1

Answer: B) The Republic of Tesla; Tech leads to higher GDP per capita in the long run.

Reason: Better technology leads to an increase in investments and savings in the long run as it leads to an increase in capita per person resulting in the real GDP increase. And on the other hand less savings not always means higher standards and neither does high savings results in higher GDP per capita. Also my savings would have no effect on lowering debt of government. And hence i'll prefer to stay in The Republic of Tesla.

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