Answer Happy

3. Suppose Economy A's aggregate production function has the following CobbDouglas form: Y = AK1/3L2/3 Where output (Y) is produced using capital (K) and labour (L), and A is total factor productivity. The rate of population growth (n) is 2% per year (0.02). The rate of depreciation of capital is 10% per year (0.10). Total factor productivity equals 100 (A=100) and we assume the growth rate of A is zero. a) If the country's savings rate (s) is 10% (0.10), find its steady state capital stock per capita, income per capita, consumption per capita and investment per capita. b) Now assume that another economy (Economy B) has the same production function, depreciation rate, population growth, and total factor productivity but it saves 40% of its income. Find the same values as in question a) for this case. Will there be absolute convergence between countries A and B? c) What is the optimal (Golden Rule) level of capital per worker in steady state for Economies A and B? Which of these economies is dynamically efficient? Explain why.