2 It also satisfies Inada conditions a lim k fk which means that when capital

2 it also satisfies inada conditions a lim k fk which

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2. It also satisfies ‘Inada conditions’ (a) lim 0 '( ) k f k which means that when capital stock is too small the MPK is very large. (b) lim '( ) k f k 0 which means that MPK is very small when capital stock is too large. Demand for Goods: In a solow model, it is assumed that goods are demanded for consumption and investment purposes. Therefore, Y = C + I ...(v) On dividing eqn. (vi) by AL, we get Y AL C I AL Al y c i ...(vi) For simplification, we have assumed the economy to be a two-sector economy. Each year people save some proportion of their income (1 – b ), then, (1 – b ) is the saving rate and it lies between 0 and 1. Saving per effective labour = (1 – b ) y \ C = ( b ) y y = by + i ...(vii) y – by = i (1 – b ) y = i ...(viii) The relationship between output and saving is shown with the help of following diagram:

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