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Consider the Solow growth model. Suppose that F(K,N)=Kº5N05with d=0.1, s=0.2, n=0.01, and z=1 and take a period to be one year.


a. Determine capital per worker, income per capita, and consumption per capita in the steady-state. Show the theoretical derivation and numerical solution.


b. Now suppose that the economy is initially in the steady-state that you calculated in part a, and savings increases to s=0.4. Determine capital per worker, income per capita, and consumption per capita in the new steady state.


c. Suppose that the depreciation rate d increases, what is the effect of this change on the quantity of capital per worker and output per worker from the steady-state in a?

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Answer #1

9) N=F = 15 No5, d=01,6=02, n. 01, Z=1 a) YIK = 8:5N°5 N •5 y = k15 In steady state , Isy= (dth) k s/d+n R? 2-12 3.3057 k 5 O

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