Question

An economy (country A) has a Cobb-Douglas production function: Y = K0.4 (LE) 0.6

The economy has a saving rate of 48 percent, a depreciation rate of 2 percent, a rate of population growth of 1 percent, and a rate of labor-augmenting technological change of 3 percent.

Assume there is a second economy (country B) with everything identical to country A except for the rate of population growth, which is 2 percent. Answer questions 4 and 5 above for country B. For question 5, use the same graph for country A and only add the lines that are different for country B. Clearly show the steady state level of capital per worker in both countries.

Question 4) At what rates do • (2.5 points) output per worker, • (2.5 points) and total output grow in steady state? Explicitly show how you reach your answer.
Question 5) Make a graph that contains the • (2 points) line for output per effective worker, • (2 points) line for investment per effective worker,• (2 points) line for break-even capital line (depreciation line, • (2 points) level of steady state level of capital in the x axis, • (2 points) how much consumption in steady state (hint: indicate in the graph how much of output in steady state goes to consumption as opposed to investment).

Answer 1