Suppose, in the Solow growthmodel, that learning by doing is captured as a cost of installing new capital. Inparticular, suppose that for each unit ofinvestment, r units of goods are used up as a cost to firms.

a. Determine how r affects thesteady-state quantity of capital per worker and per capita income.

Thesteady-state quantity of capital per workerequation, when adjusted forr, would be

A.

szf(k*)/(1+r) = (n+d)k*/(1+r)

B.

szf(k*) = (n+d/1+r)k*

C.

szf(k*)/r=(n+d)k*

D.

[s/(1+r)]zf(k*)=(n+d)k*

b. Now suppose that r differs across countries. How will these countries differ in the longrun? Discuss.

Given the effect that r has on thesteady-state quantity of capital per workerequation, where a larger value of r equates to having a

higher savings rate

lower savings rate

in the standard Solow growth model. If r were to differ betweencountries, a country with a high r will have

low income per capita in the steady state.

high income per capita in the steady state.

If differences between countries are only due to differences in the costs of installing newcapital, r, then countries with low costs of installing new capital would have

lower per capita income

higher per capita income

than countries with high costs of installing new capital.