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1 Feb 2023

3   The Simple Solow Model

Question 3. Consider an economy with the following production function:

 

Y =  

s = 0.40 

= 0.1

 

 

a) What is the relationship between output per worker and capital per worker  

    

b) Derive the steady state capital and output per worker of this economy. Within the confinements of this model, how could steady state output per worker be increased?

 

c) What are the income shares L/Y and RK/Y of this economy. How do they change once the economy reaches the steady state?

 

d) What would be the saving rate   that maximizes consumption in the long run? Tip: Calculate the level of capital per worker that maximizes consumption first.