# 321HW11Sp02Answer - Instructor Kim H.H Spring 2011...

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Instructor : Kim, H.H. Intermediate Macro Analysis Spring 2011 Economics 01:220:321 1 Assignment II Answer 1. Assume that a country's per-worker production is 1/ 2 yk , where y is output per worker and k is capital per worker. Assume also that 10 percent of capital depreciates per year (= 0.10). a . If the saving rate (s) is 0.4, what are capital per worker, production per worker, and consumption per worker in the steady state? (Hint: Use s and 1/ 2 to get an equation in s, , k, and 1/2 k , and then solve for k.) b . Solve for steady-state capital per worker, production per worker, and consumption per worker with s = 0.6. c . Solve for steady-state capital per worker, production per worker, and consumption per worker with s = 0.8. d . Is it possible to save too much? Why? Answer) a. k = 16; y = 4; Consumption per worker is 2.4. b. k = 36; y = 6; Consumption per worker is 2.4. c. k = 64; y = 8; Consumption per worker is 1.6. d. Yes. If the capital stock gets so big that the extra output produced by more capital is less than the extra saving needed to maintain it, extra capital reduces consumption per worker. The saving rate exceeds the Golden Rule rate. 2. Assume that an employer believes that the “efficiency” (e) it can get from a particular worker, as a function of the hourly wage (w), is given by function e = –0.125w + 0.15w 2 0.005w 3 , at least up to a wage of 30. a. Create a table of w, e, e/w, and w/e for wages equal to 5, 10, 14, 15, 16, 20, and 25. b. Which wage gives the highest ratio of efficiency per unit of labor cost? c. Once the firm has hit on an optimal w, whatever it is, would cutting wages whenever demand falls off increase or decrease wages per unit of efficiency? Answer)

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321HW11Sp02Answer - Instructor Kim H.H Spring 2011...

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