Consider the human capital growth model with the representative consumer. The efficiency parameter of human capital accumulation technology isb. The total productivity factor is given byz= 1.5. Denote byHtthe human capital accumulated in periodt, and byuthe time spent working in periodt. Assume the initial human capital isH0= 2.5.

1. Assume there are only two periods and the consumer is willing to maximize the discounted value of her consumptions over the two periods,

C0+(C1/1+r)

wherer= 0.075 is the real interest rate. Give the optimal value ofu?

1. Empirically, it has been observed that the annual growth rate of the country consumption per capita has been close to 3.85% historically. Taking this as granted, what is your estimate ofb.