Reference no: EM13889201

Questions from Matsuyama (1999): Consider a model which combines two views of growth, one based on factor accumulation and the other based on innovation of new products, motivated by monopoly profitsk Let's assume that labor supply and productivity parameters are set to unity, L = 1 and A^{^} = 1. There is a fixed cost for innovation which is set to unity as well, F = 1. Parameters Ψ ∈ (0, ∞) and σ ∈ (1, ∞) describe marginal cost of production and the elasticity of substitution between any two varieties. Let K_t-1 is the amount of final goods left unconsumed in period t - 1 and let N_t-1 is the size of K_t-1 varieties available in period t -1. Let k_t-1 = k_t-1/θN_t-1 denotes the relative size of resource base in terms of existing products.

Question 1: Establish the relationship between profit of a monopolist and the borrowing cost. For which values of r_t, would monopolist earn a positive profit? zero profit? negative profit?

Question 2: Let

r^{^}: (σ -1/σ)².(Ψ^1-σ/σ-1)^1/σ  and x^:= σ -1/Ψ

What is the amount of innovation when r_t < r^{^?} r_t> r^{^}? and r_t = r^{^}?

Question 3:

Let k_t-1 = k_t-1 = k_t-1/θN_t-1 Establish the relationship between r_t and k_t-1.

Question 4:

Dynamics of k_t is given by the following time one map

                            f(k_t) if k_t ≤ 1
k_t+1 = Φ(k_t) =
                            g(k_t) if k_t > 1

where

              f(k_t) = Gk_t^σ-1/σ and g(k_t)= Gk_t/1 + θ(k_t-1)

Suppose σ > 2 and G ∈ (1, θ - 1) then k_t fluctuates endogenously. What are the growth rates of investment, output, and innovations along the balanced growth path? Suppose the economy converges to a unique cycle of order 2, (k_L, k_H), where
(a) 1 < k_L < k_H;
(b) 0 < k_L, < 1 < k_H.

What is the average growth rates of the economy along the path (k_H, k_L, kH k_L, k_H, ...) and how it compares with the average growth rate along the the balanced growth path?

Question 5: Steady state k** = 1 + θ-1/G becomes unstable through a Flip bifurcation when g'(k**) = -1 ⇔ G = θ - 1. At G = θ - 1 there exists a unique and globally stable cycle of order 2, (k_L, k_H) where 1 < k_L < k_H < ∞. As G decreases further, (k_L, k_H) where 1 < k_L < k_H < ∞, becomes unstable and a unique and globally stable cycle (kin kH) where 0 < k_L < 1 < k_H < ∞ emerges. For which value of G would
k_H), where 0 < k_L < 1 < k_H < ∞, becomes unstable? Can you guess what happens after (k_L, k_H) becomes unstable?