Question: Consider a Cobb-Douglas production function Y = AK L 1 with = 0.6 and A = 1.5. Assume that the savings rate is s =

Consider a Cobb-Douglas production function Y = AKL¹with = 0.6 and A = 1.5. Assume that the savings rate is s = 0.04, the population growth rate is n = 0.02 and the depreciation rate is = 0.05. 1. Using the Solow-Swan model, compute the steady state values of k, y, and of consumption per person c. 2. Find the level of s that maximizes c, and the corresponding steady state value of k.

3. Does the model allow for long-term growth? 4. Suppose the World Bank wants to help this country by either (i) directly increasing k, or (ii) by doubling A. How would each of these actions affect the steady state values of y and c and the transition dynamics of k?

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