ECON 202 - ECON 212 MATERIALS

# ECON 202 - ECON 212 MATERIALS - LONG QUESTION 1 The...

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LONG QUESTION: 1) The Republic of Solowakia has the production function given by 1/3 2/3 Y K N and that both the saving rate, s, and the depreciation rate, are both equal to 0.10. a) Verify that the above production function has the property of constant returns to scale and rewrite the production function in terms of only capital per worker. (Define , t t t t t t K Y k y N N ) (10 points) Constant returns to scale property suggests: 1/3 2/3 1/3 1/3 2/3 2/3 1/3 2/3 ( ) ( ) Y K N Y K N K N You can use any number instead of , use for example 2. 1/3 1/3 2/3 1/3 t t Y K N K N N N y k b) Solve for the steady state values of capital per worker (k*), output per worker (y*), and consumption per worker (c*). Draw a diagram that shows all three steady state values you calculated. (10 points) At steady state we know that change in k is 0, therefore 1/3 2/3 3/ 2 * * *1/3 0 ( ) 0 1 1 t t t t t t t t t t k k sf k k sk k s k s k y k

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