HomeAs4 - Fall 2010 - Answer Key

HomeAs4 - Fall 2010 - Answer Key - Econ 3T03 Home...

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Econ 3T03 Fall 2010 Home Assignment #4: Answer Key. 1. (4 points) Consider 2 countries, Avataria and Pandora. The total saving rate in Avataria is 30%, while the saving rate in Pandora is 25%. Avataria splits its savings equally between investing into physical and human capitals. Pandora splits all the savings between investing into physical and human capitals in proportion 1:4, i.e., out of all savings in Pandora, 80% are spent on the accumulation of human capital. Both countries produce unobtainium according to the following production function: y( k ) = k 1/5 h 4/5 where k and h are physical and human capitals, respectively. (a) Based on human capital theory, what is the growth rate of output per capita in each country? (b) Does the total saving rate serve as a good indicator of which country grows faster? Answer: (a) According to human capital theory, the growth rate in the country with the production function as the one above is g = s 1/5 q 4/5 where s is the saving rate of physical capital accumulation and s is the saving rate of human
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HomeAs4 - Fall 2010 - Answer Key - Econ 3T03 Home...

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