Which country has higher steady state income per capita

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Reference no: EM131166299

Consider two countries ‘Milkie’ and ‘Cookie’. The two countries have identical per capita production function, y = Ak0.5, with initially the same level of technology, A = 1. Also, assume that the saving rate is s = 0.2 for ‘Milkie’ and s = 0.3 for ‘Cookie’, respectively, while the two countries have identical population growth and depreciation rates both equal to 0.1.

(a) Which country has a higher steady state income per capita? Determine the steady state income per capita for each country. Which country has a higher steady state growth rate in per capita income? Why?

(b) Assume now that ‘Milkie’ experiences a productivity boom facing a higher value for A, A = 2 now for this country. All else remaining the same, how would it affect the steady state income for ‘Milkie’? Determine the new steady state income per capita for ‘Milkie’.

Reference no: EM131166299

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