Reference no: EM132601347

Question 1. An economy has the following production function: Y = K^1/2 L^1/2

There is no technological growth in the economy. Some more additional details known about the economy:

• The savings rate (s) is equal to 0.4.
• The population growth rate (n) is equal to 0.03.
• Depreciation rate (δ) is at 0.07.

(a) Derive the function of output per worker in terms of capital per worker.

(b) Find the steady state levels of capital per worker, output per worker and the marginal product of capital.

(c) Using your answer from part (b), determine whether the steady state capital per worker is at Golden Rule level. How do you know?

(d) Assume that the economy successfully transitioned itself to the the savings rate of 0.5. Would such an increase be enough to take the economy to the Golden Rule level? Explain.

(e) Compute the steady state consumption before and after the transition. Do you see an improvement in consumption?

(f) Provide a graphical illustration to the transition of the economy from savings rate of 0.4 to 0.5.