Capacity Utilization Consider a new factor, capital utilization, for the Solow Model1 . In many instances capital is underutilized because it needs repair or because production demands do not require it. For example, a factory may only be used during working hours when workers are available. If new workers are available and willing to work a later shift, utilization of the factory could rise. Capital utilization, u, represents the fraction of the actual installed capital stock used in production. For our Solow model, utilization will only change the production function 2 .

Yt = A(uKt1) L1

1.1 Deriving Steady States Derive the steady state of capital (K ) in terms of the exogenous variables and parameters (A, u, s, ,L, ). Also, derive the steady for output (Y )