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Problem Set 9

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Problem Set 9

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fry8k45mbb
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ECON009: Advanced Mathematical Methods for Economics

Problem Set 9 (Solow Growth Model)

Instructor: Mr. Rohit

Question 1: (Solow growth Model: Depreciation of Capital and Population Growth)


Consider an economy for which Y(t) denotes the national product, S(t) denotes national saving, I(t)
denotes investment, K(t) denotes capital stock, and L (t) denotes the number of workers in a
country at the time t. Suppose that for all t ≥ 0
Y(t) = A K α L 1−α
S(t) = sY
I(t) = S(t)
·
K(t) = I(t) − δK
L (t) = L 0 e nt
where s is the constant rate of saving. A, α, s, δ, L 0, and n are all positive constants.
(a) Does this production function have constant returns to scale? Explain.
(b) What is the per-worker production function, y = f (k)?
(c) Determine the differential equation determining the path of capital per worker and find its
solution.
(d) What is the equilibrium state of capital per worker? Discuss its stability. Draw a phase diagram.
(e) What is the golden rule steady-state? Find GRSS for the given economy.
(f) For A = 1, α = 0.5, s = 25 % , δ = 0.04 and n = 1 % , Find equilibrium state of capital per
worker and golden rule steady state of capital per worker.

Question 2: (Augmented Solow Growth Model: Introducing Technological Progress)


Let’s introduce technological progress in the Solow growth model as described in Question 1.
Now we redefine the labour force as the effective labour force, E, which includes not only the
number of workers but also the impact of technological improvement.
Assuming that effective labour units per person grow at the rate g, we have
E(t) = L (t)e gt
Since the Labor force grows at the rate n, then we have
E(t) = L 0 e (n+g)t
Y L
(a) What is the per-effective-worker production function, ŷ = f (k)̂ ? (Hint:ŷ = and k̂ = )
E E
(b) Derive the differential equation for capital per effective worker.
ECON009: Advanced Mathematical Methods for Economics
Problem Set 9 (Solow Growth Model)

(c) Find the steady-state value of k̂ and conduct a qualitative analysis.


(d) Show that in this augmented model, output per worker( i.e. y) grows at the rate g in the steady-
state.

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