Exercise 2.

Part (a)

According to the path for capital given by (8), consumption in period t is

ct = f (kt ) − kt+1

= ktα − αβktα

= (1 − αβ) ktα .

Therefore,

∞
X
v (k0 ) = β t ln [(1 − αβ) ktα ]
t=0
∞
X ∞
X
t
= ln (1 − αβ) β +α β t ln kt
t=0 t=0
∞
ln (1 − αβ) X
= +α β t ln kt .
1−β t=0

Since kt+1 = αβktα , we can find kt as a function of k0 by solving the linear first-order difference equation

k̃t+1 − αk̃t = ln αβ,

1
where k̃t ≡ ln kt . The homogeneous equation has a unique eigenvalue λ = α, so the general solution to
the homogeneous equation is k̃t = C1 αt , C1 ∈ R. A particular solution is some constant A, determined
by solving A − αA = ln αβ. So the general solution is

ln αβ
k̃t = C1 αt + ,
1−α

where C1 ∈ R. Using the boundary condition,

 
ln αβ ln αβ
ln kt = ln k0 − αt + .
1−α 1−α

Therefore,
∞   
ln (1 − αβ) X ln αβ ln αβ
v (k0 ) = +α βt ln k0 − t
α + .
1−β t=0
1−α 1−α

Simplifying,
ln (1 − αβ) αβ ln αβ α
v (k0 ) = + + ln k0 .
1−β (1 − β) (1 − αβ) 1 − αβ

Part (b)

We just need to show that

ln (1 − αβ) αβ ln αβ α
+ + ln k =
1−β (1 − β) (1 − αβ) 1 − αβ
 
α ln (1 − αβ) αβ ln αβ α α
= ln [(1 − αβ) k ] + β + + ln (αβk ) .
1−β (1 − β) (1 − αβ) 1 − αβ

So

 
αβ ln αβ α α αβ ln αβ α α
ln (1 − αβ)+ + ln k = ln [(1 − αβ) k ]+β + ln (αβk )
(1 − β) (1 − αβ) 1 − αβ (1 − β) (1 − αβ) 1 − αβ

⇐⇒

2
  
αβ ln αβ α α αβ ln αβ α α
+ ln k = ln k + β + ln (αβk )
(1 − β) (1 − αβ) 1 − αβ (1 − β) (1 − αβ) 1 − αβ

⇐⇒

α2 ln k
 
αβ ln αβ α αβ ln αβ α ln (αβ)
+ ln k = α ln k + β + +
(1 − β) (1 − αβ) 1 − αβ (1 − β) (1 − αβ) 1 − αβ 1 − αβ

⇐⇒

α2 ln k
 
αβ ln αβ α α ln (αβ)
+ ln k = α ln k + β +
(1 − αβ) 1 − αβ 1 − αβ 1 − αβ

⇐⇒

α α2 β ln k
ln k = α ln k +
1 − αβ 1 − αβ

⇐⇒

α (1 − αβ)
ln k = α ln k
1 − αβ

⇐⇒

0=0

Q.E.D.