Adjustment costs for human and physical capital. Consider the model from section in which consumables and physical and human capital are produced by the same technology. Imagine, however, that there are adjustment costs for changes in the two types of capital. The unit adjustment costs, analogous to the formulation discussed in section 3.3, are (b_K /2)·(I_K /K) for K and (b_H /2)·(I_H /H) for H. Assume that the depreciation rates for each types of capital are 0.

a. Discuss the parameters b_K and b_H. Which one would likely be larger?

b. Suppose that b_K = b_H. Discuss the short-run dynamics if the economy begins with K(0)/H(0)(K/H)∗?

c. Suppose now that b_K H. Redo part b, and comment on the main differences in the results.