Question

a) Consider a world with decreasing returns to scale (i.e, ? = ? 1 2) in the steady state which experiences an increase in the population growth rate. What happens to total output and output per worker?

b) . What happens to the steady-state standard of living in an economy with population growth rate n and labor-augmenting technological progress g? The standard of living is ? ? . Explain

c) With population growth rate n and no technological progress, we can find the Golden Rule steady state by doing what with the marginal product of capital?

Answer 1

a) Let 'n' is growth in labor force. As growth occurs, k= K/L declines and y= Y/ L also declines.

In steady state, there's no change in k so there's no change in y. That means output per worker and capital per worker are both constant. Since the labour force is growing at the rate n , Y is also increasing at rate 'n' .

b) Output change over time if the inputs process change .AL is seen as effective labour and any technological progress that enters through them is considered to be labour augmenting.

C) The equilibrium value of capital per effective worker increases with the increase with the saving ratio. In steady state, the per capita income path is higher for a greater saving ratio. It describes that the net marginal product of capital is equal to the growth rate of total output.