Question 2 Assume an economy's aggregate production function has the following form Y = AK³L¹-* Where a = 0.25 and where output Y is produced using capital K and labour L, and A is total factor productivity. The population growth rate n is 1.5% per year. The depre- ciation rate of capital is 10%. Total factor productivity equals 20 i.e. A = 20 and we assume the growth rate of A is zero. a) Show that the production function displays constant returns to scale. b) Show that the production function displays diminishing returns to capital. c) If the country's savings rates is 20%, find its steady state capital stock per capita, income per capita, consumption per capita, and investment per capita. d) What is the optimal i.e. Golden Rule capital stock per capita in this economy in steady state? Is this economy dynamically efficient? Explain your answer.

Question 2 Assume an economy's aggregate production function has the following form Y = AK³L¹-* Where a = 0.25 and where output Y is produced using capital K and labour L, and A is total factor productivity. The population growth rate n is 1.5% per year. The depre- ciation rate of capital is 10%. Total factor productivity equals 20 i.e. A = 20 and we assume the growth rate of A is zero. a) Show that the production function displays constant returns to scale. b) Show that the production function displays diminishing returns to capital. c) If the country's savings rates is 20%, find its steady state capital stock per capita, income per capita, consumption per capita, and investment per capita. d) What is the optimal i.e. Golden Rule capital stock per capita in this economy in steady state? Is this economy dynamically efficient? Explain your answer.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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