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Econ 365
M. Muniagurria
Problem Set 1
(I)
In the Solow Model with no population growth and no technological change,
how does the
savings rate affect the growth rate of output per worker along the Balanced Growth Path (BGP)?
Justify fully using a diagram and/or a precise explanation.
(II)
Problem 1 from Problems and Applications, page 109 from Mankiw (reproduced below).
Country A and Country B both have the production function:
Y = F (K, L)
= K
1/2
L
1/2
.
(a) Does this production function have constant returns to scale? Explain.
(b) What is the perworker production function, y = f(k) ? (where y= Y/L, k=K/L)
(c) Assume that neither country has population growth or technological progress and that 5% of
capital depreciates each year. Assume further that country A saves 10 % of output each year and
country B saves 20 % of output each year. Use your answer from part (b) above and the Balanced
Growth Path (BGP) condition that
)
k= 0
to find the level of capital per worker for each
country at the BGP . Then find the levels of income per worker and consumption per worker at
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This note was uploaded on 08/08/2008 for the course ECON 365 taught by Professor Muniagurria during the Spring '07 term at University of Wisconsin.
 Spring '07
 Muniagurria
 Economics

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