Continuing with the logic from Problem 7, suppose that the economy's production function is given by Y = K1/3N2/3 and that both the saving rate, s, and the depreciation rate, d, are equal to 0.10.

a. What is the steady-state level of capital per worker?

b. What is the steady-state level of output per worker? Suppose that the economy is in steady state and that, in period t, the depreciation rate increases permanently from 0.10 to 0.20.

c. What will be the new steady-state levels of capital per worker and output per worker?

d. Compute the path of capital per worker and output per worker over the first three periods after the change in the depreciation rate.

Problem 7

The Cobb-Douglas production function and the steady state

This problem is based on the material in the chapter appendix. Suppose that the economy's production function is given by

and assume that a = 1/3.

a. Is this production function characterized by constant returns to scale? Explain.

b. Are there decreasing returns to capital?

c. Are there decreasing returns to labor?

d. Transform the production function into a relation between output per worker and capital per worker. e. For a given saving rate, s, and depreciation rate, δ give an expression for capital per worker in the steady state.

f. Give an expression for output per worker in the steady state.

g. Solve for the steady-state level of output per worker when s = 0.32 and δ = 0.08.

h. Suppose that the depreciation rate remains constant at δ = 0.08, while the saving rate is reduced by half, to s = 0.16. What is the new steady-state output per worker?