solutions_to_assignment_3

solutions_to_assignment_3 - Solutions to Assignment 3 1 The...

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Solutions to Assignment 3 1. The per-capita production function is: y = Ak 1 = 3 The ratio of output in countries A and B is therefore given by: y a y b = A a A b ( k a k b ) 1 = 3 Plugging in y a y b = 1 : 5 and k a k b = 2 , we obtain A a A b = 1 : 19 . 2. There is no contradiction. The Solow model implies that the steady-state rate of growth of any country is independent of its rate of saving. However, out of steady-state, the rate of growth does depend on the rate of saving. The Solow model implies that if two countries have the same rate of saving, the richer country must be growing slower, and this is what tests of convergence are based on. 3. (a) The e¢ cient allocation of labor across sectors requires that the value of the marginal product of labor is equalized in the two sectors. The value of the marginal product is de°ned to be the marginal product multipled by the price of the product. So if we have two sectors A and B, the condition for e¢ ciency is: P A MPL A = P B MPL B (b) Suppose sector A is competitive and sector
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