05 Jun Question Problem Set #2 ECN 101 Due: Thursday July 9, 2015
Question
Problem Set #2
ECN 101
Due: Thursday July 9, 2015
Question 1: Capital’s share in GDP in a country is 50% and the labor’s share the remaining
50%. Capital grows at a rate of ?K/K = 3% per year and labor at a rate of n = 1% per year. The
Solow residual currently is A = 2 and grows at a rate of 2% per year. Capital depreciates at a rate
of d = 4% per year. The saving rate is s = 20%. Currently K = 100 and N = 100. This question is
about Solow model with neutral technological progress. Some of the information is redundant!
a) Find the steady state levels of capital per worker (k) and GDP per worker (y).
b) What are the steady state growth rates of k and y?
c) What are the steady state growth rates of K and Y?
Question 2: The technology of an economy is characterized by the following production
function
???? = ????
????
(????????)
1?????
We know:
???? = 0.25 (???????????????????????? ????????????????)
???? = 0.01 (???????????????????????????? ????????????????????? ????????????????)
???? = 0.04 (???????????????????????????? ???????????????????????????????????????????????? ????????????????)
Technology grows endogenously according to:
???? =
????
????
a) Prove that this economy does not have a steady-state growth path.
b) Show that in this model a 1% increase in the saving rate will result in a 1% permanent
increase in output per worker.
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