Problem 2 Consider an economy described by the production function: Y = F(K,L) = K 1/2...

Problem 2

Consider an economy described by the production function: Y = F(K,L) = K 1/2 L 1/2

a. What is the per- worker production function?

b. Assuming no population growth or technological progress, find the steady- state capital stock per worker, output per worker, and consumption per worker as a function of the saving rate and the depreciation rate.

c. Assume that the depreciation rate is 10 percent per year. Make a table showing steady-state capital per worker, output per worker, and consumption per worker for saving rates of 0 percent, 10 percent, 20 percent, 30 percent, and so on. (You will need a calculator with an exponent key or Excel for this.) What saving rate maximizes output per worker? What saving rate maximizes consumption per worker?

d. Use calculus to find the marginal product of capital. Add to your table from part (c) the marginal product of capital net of depreciation for each of the saving rates. What does your table show about the relationship between the net marginal product of capital and steady-state consumption?

Expert Solution

Rahul Sunny answered 2 years ago

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