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ps3 - Name SID Problem Set#3 Due Tuesday Problem Sets MUST...

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Problem Set #3 (Fall 2007) 1/3 Name: _______________________ SID: _______________________ Problem Set #3 Due Tuesday, October 16, 2007 Problem Sets MUST be word-processed except for graphs and equations. QUESTIONS 1. Suppose that a group of computer hackers discovers a way to break into secure computer networks, rendering such networks useless as a business tool and making obsolete the business methods developed over the last 15 years. a. Use a basic Solow Growth Model diagram to clearly show what happens to the level of output- per-worker and the capital-to-labor ratio assuming that neither the size of the capital stock nor depreciation rates are directly affected by this development. b. Provide a brief economic explanation of the adjustment process, i.e., explain what happens to move the economy from its initial steady state equilibrium to its new steady state equilibrium. Be sure to discuss the economy’s growth rate at the initial steady state, at the final steady state, and during the transition period. 2. In the country of Happy Valley, a highly contagious disease immediately kills one-half of the workers between the ages of 20 and 35 years. The disease then disappears. Other workers are not affected. Because job skills rise with age, there is a significant increase in the quality of work skills for the labor force. Depreciation rates are not affected.
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