Suppose the production function is given by: Y = K
1
3 (AN)
2
3 . The savings rate s is equal to 10%, and the
depreciation rate delta is equal to 5%. Also, assume that the number of workers increases by 2% per year, and
the rate of technological progress is 3% per year.
1. Find the steady-state values of:
3
(a) Capital per effective worker
(b) Output per effective worker
(c) Growth rate of capital, output and consumption per effective worker
(d) Growth rate of capital, output and consumption per worker
(e) Growth rate of capital K total output Y
2. According to your findings in (1), does the model exhibit a balanced growth?
3. Now, suppose that the rate of technological progress doubles to reach 8% per year. What happens to
the answers to question 1? Justify.
4. Suppose now that the rate of technological progress remains at 4% per year, but the growth rate of
the number of workers increases to 6% per year. What happens to the answers to question 1 ? Justify.