The purpose of this question is to study the predictions of the Solow model for capital flows between rich and poor countries. In the Solow model, firms hire capital and pay a rental rate r for the services of k. Production is given by y = Akº and r is determined as the rate that maximizes profits or that solves: Akark To maximize the previous expression capital must be rented until the marginal product of capital, MPK equals the return: [You don't need to maximize profits but just assume that returns are equal to MPK] r = a Aka-1

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Q1 Question 1- The Lucas Paradox
5 Points
The purpose of this question is to study the predictions of the Solow model for capital flows
between rich and poor countries. In the Solow model, firms hire capital and pay a rental rate r for
the services of k. Production is given by y = Akº and r is determined as the rate that maximizes
profits or that solves:
Aka - rk
To maximize the previous expression capital must be rented until the marginal product of capital,
MPK equals the return: [You don't need to maximize profits but just assume that returns are equal
to MPK]
r = αAkª-1
The relationship between the return to capital r, income y, and technology A is:
Or=
=aA y
Or=aAya
Or=aAaya
Or=aAy
Or=aA¹¹y
Save Answer Last saved on Sep 09 at 6:39 PM
Transcribed Image Text:Q1 Question 1- The Lucas Paradox 5 Points The purpose of this question is to study the predictions of the Solow model for capital flows between rich and poor countries. In the Solow model, firms hire capital and pay a rental rate r for the services of k. Production is given by y = Akº and r is determined as the rate that maximizes profits or that solves: Aka - rk To maximize the previous expression capital must be rented until the marginal product of capital, MPK equals the return: [You don't need to maximize profits but just assume that returns are equal to MPK] r = αAkª-1 The relationship between the return to capital r, income y, and technology A is: Or= =aA y Or=aAya Or=aAaya Or=aAy Or=aA¹¹y Save Answer Last saved on Sep 09 at 6:39 PM
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