Question

Consider our usual diagram for the Solow model (that is, the diagram showing f(k), sf(k) and (n+g+δ)k as functions of k). In class we discussed the level of k where the sf(k) and (n+g+δ)k curves intersect—this is the level of k on the balanced growth path. In contrast, we did not discus the level of k where the f(k) and (n+g+δ)k curves intersect. This problem remedies that oversight. Specifically:

a) What would the saving rate have to be for k to rise to the point where f(k) and (n+g+δ)k are equal?

b) What would c, consumption per unit of effective labor, be in this case?

Answer 1

When demand and supply both shift simultaneously, if the change in quantity (price) can be predicted, the change in price (quantity) is indeterminate. The change in equilibrium quantity or price is indeterminate when the variable can either rise or fall depending upon the relative magnitudes by which demand and supply shift . Law of demand in not being violated in this case, as there is significant drop in tourism industry sue to variable factors and multiple new entrants are entering in this industry is causing the prices of tickets to decrease. Once, the tourism industry will thrive the demand and supply equilibrium will be maintained, and ticket prices will go higher accordingly.