Question

The Solow model

A does not explain technological progress but, instead, takes it as exogenously given

B seeks to explain technological progress and therefore treats it as an endogenous variable

To incorporate technological progress, we write the production function as

Y = F(K, L x E), where (choose one or more)

A E is the efficiency of labor

B L x E is the effective number of workers

C g is the rate of labor-augmenting technological progress

D n is the rate of growth of the labor force

E the effective number of workers L x E is growing at the rate n + g

Most technological progress has been

A labor augmenting

B labor saving

Identify those statements that are TRUE. (Choose one or more)

A The steady-state level of capital per effective worker, k, is where break-even investment, (δ + n + g)k is equal to investment sf(k)

B According to the Solow model, only technological progress can explain sustained growth and persistently rising living standards.

C The steady-state consumption per effective worker is c* = f(k*) – (δ + n + g)k*.

D Steady-state consumption is maximized if MPK = δ + n + g

E Steady-state consumption is maximized if MPK – δ = n + g

Answer 1

1> A does not explain technological progress but, instead, takes it as exogenously given

Technology is considered exogenous to the Solow model and the model does not explicitly tells us how technology can be nurtured and developed.

2> A, B, C, D and E

All of them are correct

When the technology in endogenized where the effect of technology is labor augmenting, then the productivity of workers increase with rise in technology, so the number of effective workers is LE where labor grows by n and labor augmenting technology E grows by g and LxE grows by g+n.

3> A labor augmenting

A technical change is labour saving if it raises the marginal product of capital relative to labour at constant capital labour ratio. Generally, this is not the case, generally the rise in marginal product of labor is higher.

4> A, B, C

At steady state, c* = f(k*) – (δ + n + g)k*. so that the consumption can be seen as the residual output that remains after providing for the investment that maintains steady state. Also, in Solow model, technology can only keep sustained growth rate. For D and E, it is true only at golden rule.