What is the per effective worker production function

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Reference no: EM131083585

Consider an economy where the production function is Y = K0.5 (LE) 0.5 The depreciation rate is δ = 0.04, the savings rate is s = 0.2, the population growth rate is n = 0.03 and technology growth rate is g = 0.03. (a) What is the ’per effective worker’ production function? (b) Find the steady state levels of capital per effective worker (k ∗ ), income per effective worker (y ∗ ), investment per effective worker (i ∗ ) and consumption per effective worker (c ∗ ). (c) Find the golden rule levels of capital per effective worker (k ∗ g ), income per effective worker (y ∗ g ), investment per effective worker (i ∗ g ) and consumption per effective worker (c ∗ g ). Also find sg, that is the level of the savings rate that would lead the economy to the golden rule steady state. (d) Suppose the government pursues policies that change the savings rate from s = 0.2 to sg. What is the immediate effect on income per effective worker and consumption per effective worker? What is the long run effect on income per effective worker and consumption per effective worker? (You are asked to compute the effects; show your work and provide numbers!)

Reference no: EM131083585

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