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Question 1 Chapter 8

1. The production function exhibits constant returns to scale as doubling all inputs doubles output. 2. For the first year: Output per worker is 2, consumption per worker is 1.6, investment per worker is 0.4, and depreciation per worker is 0.2. 3. The steady-state level of capital per worker is 4. The Golden rule level of capital per worker is 25 and the corresponding output per worker is 5.

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157 views6 pages

Question 1 Chapter 8

1. The production function exhibits constant returns to scale as doubling all inputs doubles output. 2. For the first year: Output per worker is 2, consumption per worker is 1.6, investment per worker is 0.4, and depreciation per worker is 0.2. 3. The steady-state level of capital per worker is 4. The Golden rule level of capital per worker is 25 and the corresponding output per worker is 5.

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Question 1.

Chapter 8
Given the following production function:
Y = K1/2 L1/2
Assume: saving rate (s = 0.20), depreciation rate (δ = 0.05), population growth (n =
0.05), and capital per worker that the economy starts off with in year one (k = 4).

Determine whether the above production function is constant, decreasing, or


increasing return to scale.
1. What is the per worker production function?
2. Find the following: output per worker, consumption per worker, investment
per worker, depreciation per worker. For the first year.
3. Find the steady-state level of capital per worker. (k*)
4. Find the Golden rule level of capital per worker. (k* Gold)
5. Calculate the level of output per worker at this Golden rule. (y* Gold )

1. Y = F(K, L) = K1/2 L1/2


Y0 = F(K, L) = K1/2 L1/2
Y1 = F(2K, 2L) = (2K)1/2 (2L)1/2
Y1 = 21/2 21/2 (K)1/2 (L)1/2
Y1 = 21 (K)1/2 (L)1/2
Y1 = 2 K1/2 L1/2
Y1 = 2 Y0 Constant Return to Scale

2. Given the production function:


Y = K1/2 L1/2
Y / L = (K1/2 L1/2) / L
Y / L = K1/2 L1/2 L-1
y = K1/2 L-1/2
y = K1/2 L-1/2
y = K1/2 / L1/2
y = (K/ L)1/2
y = k1/2 y = Y / L, k = K/L

3. y = (k)1/2
y = (4)1/2
y=2 Output per worker.

c = (1 – s) y
c = (1 – 0.20) (2)
c = (0.80) (2)
c = 1.6 Consumption per worker.

1
Since 0.20 of output is saved and invested and 0.80 of output is consumed. So,
i = sf(k )
i = 0.20(2)
i = 0.4 Investment per worker.

Depreciation per worker


Depreciation = δk
= 0.05 (4)
= 0.20 depreciation per worker.

4. Steady-state level of capital per worker (k*)


The steady-state level of capital per worker, is where:
Δk = 0
Δk = s f(k) – (n + δ) k
0 = s f(k) – (n + δ) k
s f(k) = (n + δ) k
k / f(k) = s / (n + δ)

This equation provides a way of finding the steady-state level of capital per
worker (k*).
Substituting the numbers and production function, we obtain:

k / f(k) = 0.20 / (0.05 + 0.05)


k / k1/2 = 0.20 / (0.10)
k k-1/2 = 2
k1/2 = 2
k* = 22
k* = 4 steady-state level of capital per worker.

5. Golden rule level of capital per worker (k* Gold)


To find the Golden rule capital per worker, express:

c* = y* - i*
c* = f(k*) – (n + δ) k* k* Gold where c* is maximized.
c* is maximized when:
MPK = (n + δ)
Or equivalent, MPK – δ = n

dc/dk* = 0
dc/dk* = f ' (k*) – (n + δ) = 0
f ' (k*) = (n + δ) f ' (k*) = MPK = dy / dk
since
y = k1/2
dy / dk = 1/2 k-1/2

MPK = (n + δ)

2
0.5 / k1/2 = (0.05 +0.05)
0.5 / k1/2 = (0.10)
Square both sides,
0.25 / k = 0.01
0.01k = 0.25
k*Gold = 0.25 / 0.01
k*Gold = 25 Golden rule level of capital per worker that maximize consumption.

6. The level of output per worker at this Golden rule (y* Gold):
y = k1/2
y* Gold = (25) 1/2
y* Gold = 5. Golden rule level of output per worker

3
1.
Based on the Solow Model the consumption function assumes that society
saves a:

A. constant proportion of income.


B. smaller proportion of income as it becomes richer.
C. larger proportion of income when the interest rate is higher.
D. larger proportion of income when the interest rate is higher.
E. None of the above is correct

2.
.--------- cause(s) the capital stock to fall, while- - - -- - --- cause(s) the capital
stock to rise.
A. Inflation; deflation
B. Interest rates; the discount rate
C. Investment; depreciation
D. International trade; depressions
E. depreciation; Investment
F. None of the above is correct

3. Based on the Solow growth model of Chapter 8, the economy ends up with
a

steady-state level of capital:

A. only if it starts from a level of capital below the steady-state level.

B. only if it starts from a level of capitalabove the steady-state level.

C.only if it starts from a steady-state level of capital.

D. regardless of the starting level of capital.

E. None of the above is correct

4
4.
In the Solow growth model, the steady-state occurs when:

A. capital per worker is constant.

B. the saving rate equals the depreciation rate.

C. output per worker equals consumption per worker.

D. consumption per worker is maximized.

E. capital per worker is zero.

5. In the Solow growth model, with a given production function, depreciation


rate, no technological change, and no population growth, a higher saving rate
produces a:

a. higher MPK in the new steady-state.


B. higher steady-state growth rate of output per worker.
C. higher steady-state growth rate of total output.
)above (‫اذا اجت‬
d. higher steady-state level of output per worker.
E. None of the above is correct. higher ‫الجواب‬
.

6. When an economy begins below the Golden Rule, reaching the Golden
Rule:
A. produces lower consumption at all times in the future.
B. produces higher consumption at all times in the future.
C. requires initially reducing consumption to increase consumption in the
future.
D. requires initially increasing consumption to decrease consumption in the
future.
E. None of the above is correct

In a Solow model with technological change, if population grows at a 2


percent rate and the efficiency of labor grows at a 3 percent rate, then in the
steady state output per effective worker grows at a------- percent rate.

A. 0
B. 2
C. 3
D. 5

5
8. Given the following production function: Y = 100 K^0.25L^0.75, then the

share of output going to labor:


A. is 100 percent.

B. is 45 percent.

C. depends on the quantities of labor and capital.

D. depends on the state of technology.

E. None of the above

Y= 10(K)025 (L)075

And capital lasts an average of 10 years, so that (8= 0.10) of capital wears out
every year. Assume that the rate of growth of population is (n = 0.06), and the
saving rate is(s = 0.32).

1. Derive the equation for output per worker (y). (1 Point)


2. Calculate the Steady state level of capital per worker. (2 Point)
3. Calculate the Steady state level of consumption per worker. (2 Point)
4. Calculate the Steady state level of depreciation per worker. (1 Point)

5. Use graph to show your work in part 2. (1 Point)

6. Find the Golden-rule level of capital per worker. (2 Points)

7. Find the Golden-rule level of output per worker. (1 Point)8. Use graph to
show your work in parts 6 and 7. (1 Point)

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