Problem 3: Solow Model with No Technological Change

Assume that we live in an imaginary world where there are two countries: Cocoloco and Sambapati. These two countries have the same population size, population growth, depreciation rate and production function. But Cocoloco has a larger capital stock than Sambapati. Output in both countries is produced according to the following constant-returns-to-scale production function that lies at the heart of the standard Solow growth model: Y(t) = 35[K(t)]0.5[L(t) ]0.5 where Y(t) is the aggregate output in year t, K(t) is the capital in year t, and L(t) is the labor in year t. Assume that the savings rate is 18% (s = 0.18), the population grows at a rate of 0.9 % per year (n = 0.009), and capital depreciates at a rate of 1.6% per year (d = 0.016)