Consider a closed economy, in which the aggregate production function is = AK^ 0.2 h^0.3 N^0.5. Suppose that h = Bk . There are also transaction costs taking the form of legal fees captured by the parameter , which measures the per worker transaction costs of converting savings into investment. In addition, suppose that two First Nations Reserves (FNRs) have identical population size and share the following parameters: A= 4, B=1, s= 10%,n = 0%, b= 30%and d= 10%.OneoftheFNRsisinthe low-income steady state equilibrium, kL^* = 1, and the other FNR is in the high-income steady state equilibrium, kH^*=9.Allvariablesandparametersaredefinedasinthelecturenotes.

Suppose that the federal government signs a treaty with each of the two FNRs that reduce the size of the transaction costs to b = 20 %.

1. Convert the aggregate production function into the per worker production function by expressing as a function of h.
2. b) Solve for the steady state human capital per worker, h, for each of the two equilibria corresponding to b= 20 %.
3. c) Solve for the steady state output per worker, , for each of the two equilibria corresponding to b = 20 %.