Question

Assume that the stock of capital increases by 6% and employment increases by 4%. Given this information, we know that in Solow model without technological progress:

a. output per capita will increase by less than 3% and more than 2%.

b. output per capita will increase by less than 2% and more than 1%.

c. output per capita will increase by more than 3%.

d. output per capita will increase by 5%.

e. output per capita will increase by less than 2%.

Answer 1

In a Solow Model,

Output per worker y = k

Growth rate of output per worker, y is directly proportional to growth rate in capital per worker

gy directly proportion to gk

Now, k = K/L

So, g_k = g_K - g_L = 6 - 4 = 2%

g_k = 2%

It is given that output per capita is proportion of capital per worker, where < 1

So, output per capita will increase by less than 2%

Hence, option e. is correct

**if you liked the answer, then please upvote. Would be motivating for me. Thanks.