Question

Problem 3. Suppose that output in the economy can be defined by the following production function F(K,N) VKAN, where A is the technology parameter that remains constant at A 10. Labor force grows at 4% per annum, the capital depreciation rate equals 16% and people consume 90% of their income. a) b) c) d) Find the intensive form of the production function (per worker). Find the steady-state level of capital per worker and output per worker. Present the appropriate graph. Suppose that in period t capital per worker equals 3. How will this ratio change in period t+1? Why? Suppose the economy is in steady state when a large group of immigrants enters the country. The immigrants are ready and willing to work. What will be the consequences for the capital per work and output per worker ratios? Explain using the appropriate time- graphs. Problem 4. Attempt again problem 3, parts (a) and (b), assuming that there is technological progress and the rate of technological progress is g = 5%. Note: now you should consider capital and output per effective worker.

Answer 1

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