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Question 2 130 marks] Suppose that the production function is given by Y 0.5VKv/N. Assume that the size of the population, the labour participation rate and the unemployment rate are all constant. a) Does this production function exhibit constant returns to scale? Explain (5 marks) b) Explain the difference between returns to factors of production and returns to scale (4 marks) cTransform the production function into a relationship between output per worker and capital per worker. (5 marks) d) Assume that the saving rate is 16% and that capital depreciates at a rate of 8%. Calculate the steady-state output per worker and capital per worker. (6 marks) What is the effect of an increase in capital per worker on output per worker and what is the effect of technological progress on output per worker? What is the main difference between the two effects? Explain with the aid of a diagram. (10 marks)

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