Economic Growth and Development Professor Olivier de La Grandville Fall 2008 Problem Set 3 To be returned Wednesday, October 22 nd , 2008 * 1. Suppose that a given economy is governed by a CES production function with δ = 0 . 25; the labor augmenting rate of technical progress is g = 1% per year; the growth rate of population is 1% per year. Supposing that society maximizes V = R ∞0 C t e-it dt under the usual constraint, determine s * and V * for values of σ between 0.7 and 1.3 (steps of 0.05), and values of i between 0.04 and 0.09, (steps of 0.01). For the same values of σ and i , determine the ratio of the elasticity of V * with respect to σ , divided by the elasticity of V * with respect to g . 2. Suppose that the annual expected return of stocks A and B are E ( R A ) = 8% and E ( R B ) = 7%; their standard deviations are
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