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Unformatted text preview: has the highest output per worker? The highest consumption per worker? (c) Based on Solow model, does the initial capital-labor ratio serve as a good indicator of what happens with a country in a steady state? Answers: (a) Using the formula s/(n+ ) = k/y(k) , or s y(k) = (n+ ) k , We get: Avataria: 0.1 2 k 1/3 = 0.05 k , or k 2/3 = 4, so k = 8; Pandora: 0.2 2 k 1/3 = 0.4 k , or k 2/3 = 1, so k = 1. The initial capital-labor ratios have no effect on the steady-state capital-labor ratios. (b) y = 2 k 1/3 , so in Avataria y = 4, in Pandora y = 2. c = (1 s ) y , so Avataria has c = 0.9 y = 3.6, while Pandora has c = 0.8 y = 1.6. Avataria has higher levels of both output per capita and consumption per capita. (c) Initial capital-labor ratio does not affect a countrys steady state levels in Solow model. (It only affects the time and speed with which the country reaches the steady state.)...
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This note was uploaded on 12/02/2010 for the course ECON 3T03 taught by Professor Demidova during the Fall '10 term at McMaster University.
- Fall '10