Question 3 10 marks This question asks you to use a Solow Model to analyze what happens to an economy when a government imposes a proportional tax on output. 4 Assume that there is no government in the economy, so the Solow setup is completely standard. Specifically, the economy has a production function Y = K(EL)1-a, where K is physical capital, L is labor input, E is labor-augmenting technical progress, and a is an exogenous constant. The exogenous growth rates of E and L are g and n, respectively. Every period, a fraction d between 0 and 1 of the physical capital stock deteriorates. The exogenous savings rate is a constant rate s. Under these conditions, what are the steady-state values of the following quantities in terms of the exogenous variables? (Note: You do not need to draw any graphs for this question.) The capital-output ratio The ratio of capital per effective unit of labor k=; K?- The growth rate of output Y? The growth rate of output per worker? The growth rate of the marginal product of capital MPK? + The growth rate of the marginal product of labor MP L?H EL . Solution