2. Solow-Swan Model (a) You will demonstrate the importance of diminishing returns to capital in the Solow-Swan model. Draw a Solow-Swan diagram in which there are constant returns to capital. This would happen if the production function were Yt= AKt, where A = 1. Furthermore, assume that the sum of population growth and the depreciation rate is greater than the saving rate. Does the economy converge to a steady state in this case? To answer this question, you should draw a Solow-Swan diagram in terms of output per person, as we did in class. Use this diagram to explain why the economy converges to a steady state or does not. (b) Assume, instead, that the sum of population growth and the depreciation rate is equal to the saving rate. In this case, are there any steady states? If yes, describe the steady-state levels of capital per person. If no, explain why not. (Note: Diagram is not needed for this part.)
2. Solow-Swan Model
(a) You will demonstrate the importance of diminishing returns to capital in the Solow-Swan
model. Draw a Solow-Swan diagram in which there are constant returns to capital. This
would happen if the production function were Yt= AKt, where A = 1. Furthermore,
assume that the sum of population growth and the
saving rate. Does the economy converge to a steady state in this case? To answer this
question, you should draw a Solow-Swan diagram in terms of output per person, as we did
in class. Use this diagram to explain why the economy converges to a steady state or does
not.
(b) Assume, instead, that the sum of population growth and the depreciation rate is equal to
the saving rate. In this case, are there any steady states? If yes, describe the steady-state
levels of capital per person. If no, explain why not. (Note: Diagram is not needed for this
part.)
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
