**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+ δ ) = k/y(k) , or s y(k) = (n+ δ ) 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 country’s 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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- Fall '10
- demidova
- Economics, Macroeconomics, Thermodynamics, Population Ecology, World population