Consider the Solow growth model with a Cobb-Douglas production function with capital share , a constant savings rate s, a constant depreciation rate , and a constant population growth rate n (0 < s,,n < 1). Suppose equals 1/3, and TFP initially is A1 > 0.

2. Derive the steady state levels of capital and output per capita.

3. Explain intuitively why there is a steady state.

Now suppose that productivity increases by 10% to A2

4. Derive the new steady state levels of capital and output per capita. Compare them to the old ones