Question

The economies of two countries, Thrifty and Profligate, have the same production functions and depreciation rates. There is no population growth in either country. The economies of each country can be described by the Solow growth model. The saving rate in Thrifty is 0.3. The saving rate in Profligate is 0.05.

(a) Which country will have a higher level of steady-state output per worker?

(b) Which country will have a higher growth rate of output per worker in the steady state?

(c) Which country will have a higher growth rate of total output in the steady state?

Answer #1

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...

Consider two countries: Country A and Country B. Each country
has the following Cobb-Douglas type production function:
Country A: Y = (K0.5)(EL)0.5 Country B: Y =
(K0.7)(EL)0.3
Unfortunately, your knowledge of Country A is a bit limited.
You have pieces of information, but you don’t know the entire
picture.
o Savings rate (s): unknown for Country A and 14.29% for
Country B
o Steady-state value of capital per effective worker: unknown
for both countries, but you have
heard that Country...

Suppose that two countries are exactly alike in every respect
except that population grows at a faster rate in country A than in
country B. Which country will have the higher level of output per
worker in the steady state? Illustrate graphically.
(a) In which country is the level of steady-state output per
worker larger? Explain.
(b) In which country is the steady-state growth rate of output
per worker larger?
(c) In which country is the growth rate of steady-state...

QUESTION 1
Suppose an economy can be characterized by a Cobb-Douglas
production function with capital share of 1/3, and A =
200. The investment rate is 0.12 (12%), the annual rate of growth
of the labor force is 0.02 (2%), and the annual depreciation rate
of capital is 0.04 (4%). According to the Solow growth model, this
economy's steady state capital/labor ratio (capital per worker,
k) is
4,000
8,000
10,000
12,000
None of the above.
QUESTION 2
The steady state...

Consider the Solow growth model. The production function is
given by Y = K^αN^1−α, with α = 1/3. There are two countries: X and
Y. Country X has depreciation rate δ = 0.05, population growth n =
0.03, and savings rate s = 0.24. Country X starts with initial
capital per worker k0 = 1
Country Y has depreciation rate δ = 0.08, population growth n =
0.02, and savings rate s = 0.3. Country Y starts with capital per...

Dacia and Romalia are two countries with the production function
given by the following relationship: f(k) = 6 k^(1/2). Capital to
labour ratio in Dacia is twice of that of Romalia. Dacia has a 10%
saving rate, 10% population growth rate, and 5% depreciation rate,
while Romalia has a 20% saving rate, 10% population growth rate,
and 20% depreciation rate.
Compute the following: a) Steady-state capital- labour ratio for
each country. Does the initial capital-labour ratio affect the
results?
b)...

Suppose Richland has the production function YR=ARLR1/2KR1/2,
while Poorland has the production function YP=APLP1/2KP1/2. Assume
that total factor productivity (A) is fixed – i.e. not growing --
in each country, but that L and K are evolving as described in the
standard Solow model with population growth (i.e. their saving
rates are given by sR and sP, their depreciation rates are given by
dR and dP, and their population growth rates are given by nR and
nP.)
a) Write down...

Consider an economy described by the production function:
Y = F(K, L) = K0.3L0.7.
Assume that the depreciation rate is 5 percent per year.
Make a table showing steady-state capital per worker, output per
worker, and consumption per worker for saving rates of 0 percent,
10 percent, 20 percent, 30 percent, and so on. Round your answers
to two decimal places. (You might find it easiest to use a computer
spreadsheet then transfer your answers to this table.)
Steady State...

13. Suppose there is an increase in government spending in a
closed economy. In medium-run such a fiscal policy will cause:
none of the other answers is correct.
ambiguous effects on the neutral real interest rate
the nominal wage to rise
no change in the neutral real interest rate
the neutral real interest rate to rise
14. Suppose the economy is initially in the steady state.
According to Solow model without technological progress, an
increase in the depreciation rate (δ)...

Portugal has the following per-worker production function:
y=3k^0.05
Depreciation rate is 0.08, population growth rate is 0.02.
Saving is S=0.2Y, where S is national saving and Y is national
output.
(a) what are the steady state value of capital-labour ratio,
output per worker and consumption per worker?
(b) Suppose that national saving increases to 0.4, what are the
steady state value of capital-labour ratio, output per worker and
consumption per worker?
(c) Suppose depreciation rate increases to 0.20, what are...

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