Consider a small world that consists of two different countries, a developed and a developing country....
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Consider a small world that consists of two different countries, a developed and a developing country. In both countries, assume that the production function takes the following form: Y = F (K, LE) = K¹/4 (LE)3/4, where Y is output, K is capital stock, L is total employment and E is labour augmenting technology. (a) Does this production function exhibit constant returns to scale in K and L? Explain. (3 marks) (b) Express the above production function in its intensive form (i.e., output per-effective worker y as a function of capital per effective worker k). (3 marks) (c) Solve for the steady-state value of y as a function of saving rate s, population growth rate n, technological progress g, and capital depreciation rate 6. (3 marks) (d) The developed country has a savings rate of 30% and a population growth rate of 2% per year. Meanwhile, the developing country has a savings rate of 15% and population growth rate of 5% a year. Technology evolves at the rate of 8% and 2% in the developed and developing countries respectively. In both countries, 8 = 0.05. Find the steady-state value of y for each country (up to three decimal places). (3 marks) (e) What policies might the less developed country pursue to raise its level of income? For each policy, provide a few examples to illustrate your answers. (3 marks) (f) What must the saving rate be in each country in order to reach the Golden Rule steady-state? What should each country do to reach its Golden Rule steady state? (3 marks) Consider a small world that consists of two different countries, a developed and a developing country. In both countries, assume that the production function takes the following form: Y = F (K, LE) = K¹/4 (LE)3/4, where Y is output, K is capital stock, L is total employment and E is labour augmenting technology. (a) Does this production function exhibit constant returns to scale in K and L? Explain. (3 marks) (b) Express the above production function in its intensive form (i.e., output per-effective worker y as a function of capital per effective worker k). (3 marks) (c) Solve for the steady-state value of y as a function of saving rate s, population growth rate n, technological progress g, and capital depreciation rate 6. (3 marks) (d) The developed country has a savings rate of 30% and a population growth rate of 2% per year. Meanwhile, the developing country has a savings rate of 15% and population growth rate of 5% a year. Technology evolves at the rate of 8% and 2% in the developed and developing countries respectively. In both countries, 8 = 0.05. Find the steady-state value of y for each country (up to three decimal places). (3 marks) (e) What policies might the less developed country pursue to raise its level of income? For each policy, provide a few examples to illustrate your answers. (3 marks) (f) What must the saving rate be in each country in order to reach the Golden Rule steady-state? What should each country do to reach its Golden Rule steady state? (3 marks)
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a Yes the production function exhibits constant returns to scale in K and L This is because doubling ... View the full answer
Related Book For
Macroeconomics Principles Applications And Tools
ISBN: 9780134089034
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
Posted Date:
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