Question

12. What happens with no diminishing returns? Consider a Solow model where the production function no longer exhibits diminishing returns to capital accu- mulation. This is not particularly realistic, for reasons discussed in Chapter 4. But it is interesting to consider this case nonetheless because of what it tells us about the workings of the Solow model. Assume the production function is now Y, = AK. The rest of the model is unchanged. (a) Draw the Solow diagram in this case. (b) Suppose the economy begins with capital Ko, and show how the economy evolves over time in the Solow model. (c) What happens to the growth rate of per capita GDP over time?

Answer 1

Answer consider a sobw model where the production function no longer exhibits diminishing returns to capital accumulation. Assume the production function is now Ye= Ãke The rest of the model is unchanged. Solow model : The solow model is an economic model of long - Run economic growth set within the framework of neoclassical economics. it attempts to explain long-run economic grooth by growth by looking at capital accumulation lobor ar population growth and increase in productivity, commonly referred to as technological poces.

< f(x) output per worker Capital per woll. K TA) solow's model The solow's model is known as the economic literature as the "As mode". The investment Saring and depreciation is appeared to be as linear functions of capital Therefore, the Savings function is given by SA (B) when In the the economy begins with capital ko: diagram the investment or savings will always exceed the depreciation assuming

that the Savings line is steeper than the depreciation. Therefore, the economy grows . Bever. (C) Growth sate of output per capital : The growth rate of output per capita in the economy is given by, s And - Sad Therefore , s: Savings, de depreciation t= time., It is the rate of grouth of capital stock. Ak4 = sakt - dke =(SA-d) kk And this is also given by.

AY... A AK47 =A(SA-d)kt = (SA -d) yt Ayern (sa-d)yt