ECON 101B: Section 11 Handout
Date: 02/23/2011
Question 1
Suppose that the capital stock per worker (
k
) is 100, the depreciation rate (
) is 10 percent per year, and
output per worker (
y
) is 25. There is no labor force growth (
n
= 0
). What must the saving rate (
s
) be to
keep the capital stock per worker constant?
A. 2.5 percent
B. 10 percent
C. 25 percent
D. 40 percent
What happens to
k
if the saving rate is smaller/bigger?
Question 2
Again, assume there is no labor force growth. Draw a graph for the following question. If the capital stock
per worker is
above
the steadystate level, then investment
A. is smaller than depreciation.
B. is larger than depreciation.
C. is equal to depreciation.
D. could be higher than, lower than, or equal to depreciation.
What if capital stock per worker is
below
the steadystate level? What is the implication for the evolution
of
k
over time?
Question 3
Suppose that the production function is
y
=
p
k
,
s
= 0
:
40
, and
= 0
:
10
. Using your observation from
the previous question, write down the steady state condition. What is the steadystate level of capital per
worker?
A. 2
B. 4
C. 10
D. 16
Question 4
Suppose that the production function is
y
=
p
k
and
= 0
:
10
. What level of saving rate will lead to the
highest possible level of output in the steady state?
A. 25 percent
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 Spring '08
 Staff
 Economics, Steady State

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