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Unformatted text preview: Economic Growth and Development MS&E 249 Professor Olivier de La Grandville Autumn 2008 Final Answer Keys 1. (40 points) y = a = a ( y ry ) dy y = a 1 a dr r Z dy y = a 1 a Z dr r ln y = a 1 a ln r + ln C, where C is the positive constant of integration. y = Cr a 1 a y = y ( r r ) a 1 a , since C = y r a 1 a from y ( r ) = y Y/L = Y /L ( K/L K /L ) a 1 a Finally we get, Y = Y ( K/K ) 1 1 a ( L/L ) 1 a ,which is the CobbDouglas production function. 2. (60 points) In the Solow model of economic growth, equilibrium implies sf ( r * ) = nr * . On the other hand, maximization of consumption per person implies sf ( r * ) = n . Therefore in this system of two equations we can eliminate n and obtain s = r * f ( r * ) /f ( r * ). As a consequence, the savings rate should be equal to the elasticity of production with respect to capital. Typically, this number is about 0.3, which is much too high to constitute a reasonable optimal savings rate (refer to Table 2 of Chapter 13). Especially, in case of the CobbDouglas production function,(refer to Table 2 of Chapter 13)....
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 Fall '08
 OLIVIERDELAGRANDVILLE

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