Question #1. Chapter 9.
Suppose that the production function
is:
Y = 10(K)1/4(EL)3/4
And capital lasts an average of 10
years, so that (δ = 0.10) of capital
wears out every year. Assume that
the rate of growth of population is (n
= 0.04), the growth of technological
growth is (g = 0.02), and the saving
rate is (s = 0.128).
δ = 0.10 n = 0.04 g = 0.02 s = 0.128
1. Derive the equation for output
per effective worker (y^).
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y^= Y/EL (the output per effective
worker)k^ = K/EL (the amount of
capital per effective worker).
Y/EL = (10(K)1/4(EL)3/4 / EL)
y^= 10 (K)1/4 (EL)3/4 (EL)-1
y^= 10 (K)1/4 (EL)-1/4
y^= 10 (K / EL)1/4
y^= 10 (k^)1/4
y^= 10 k^1/4
2. Calculate the steady-state
levels for each of the following:
A. Steady state level of capital
per effective worker:
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Δk^ = sf(k^) – (δ + n + g) k^ = 0
= sf(k^) = (δ + n + g) k^
k^ / f(k^) = s / (δ + n + g)
k^ / 10k^1/4 = 0.128 / (0.10 +
0.04 + 0.02)
k^ / 10k^1/4 = 0.128 / 0.16
k^ k^-1/4 = 8
k^3/4 = 8
k^ = (8) 4/3
k^* = 16
B. Steady state level of output
per effective worker:
y^= 10k^1/4
y^= 10(16)1/4
y^= 10(2)
y^* = 20
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C. The steady-state level of
consumption per effective
worker:
c^ = (1 – s) y^*
c^ = (1 – 0.128) 20
c^* = (0.872) 20
c^* = 17.44
D. The steady-state level of
saving and investment per
effective worker:
Saving per effective worker (in
steady-state) = investment.
sy^ = i
S^* = sy^*
S^* = 0.128 (20)
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S^* = 2.56 = i^*
E. The steady-state level of
depreciation per effective
worker:
δk^* = 0.1(k^*)
δk^* = 0.1(16)
δk^* = 1.6
3. Find the Golden-rule level of
the following.
A. Golden-rule level of capital
per effective worker.
c^* = y^* - i^*
c^* = f(k^*) – (δ + n +g) k^*
c^* is maximized when
MPK = δ + n +g
or PMK – δ = n + g
y^ = 10k^1/4
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MPK = dy/dk = 2.5k^-3/4
MPK = 2.5 / k^3/4
MPK = (δ + n +g)
2.5 / k^3/4 = (0.10 + 0.04 +
0.02)
2.5 / k^3/4 = 0.16
0.16 k^3/4 = 2.5
k^3/4 = 2.5 /0.16 = 15.625
k^*Gold = (15.625) 4/3
k^*Gold = 39.06
B. Golden-rule level of output
per effective worker.
y^*Gold = 10 (k^*Gold) 1/4
y^*Gold = 10 (39.06) 1/4
y^*Gold = 25
4. Calculate the steady-state
growth rates of the following:
A. The steady-state growth rate
of capital per worker.
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First, we need to find the output (Y)
per worker:
Y = 10(K)1/4 (EL)3/4
y= Y/L: per worker
y= Y/L = 10(K)1/4 (EL)3/4 / L
y= 10(K)1/4 E3/4 L3/4 L-1
y= 10(K)1/4 E3/4 L-1/4
k = K/L: Capital per worker
y= 10(k)1/4 E3/4
To find the steady-state growth rate
of capital per worker, we need to
find the steady-state of capital per
worker:
The steady-state of capital per
worker:
Δk = 0
sf(k) = (δ + n) k
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k / sf(k) = δ + n
k / f(k) = s / δ + n
k / f(k) = 0.128 / 0.10 + 0.04
k / 10(k)1/4 E3/4 = 0.914
k / k1/4 = 9.143 E3/4
k k-1/4 = 9.143 E3/4
k* = (9.143)4/3 (E3/4)4/3
k* = 19.11 E
Now we can find the steady-state
growth rate of capital per worker:
Growth rate of capital (k*) = 0 +
growth rate of (E)
Δk* /k* = 0 + ΔE / E
Δk* /k* = 0 + g
Δk* / k* = 0.02
Growth rate of capital (k*) =
0.02 (2 percent)
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B. The steady-state growth rate
of output per worker.
To find the steady-state growth rate
of output per worker, we need to
find the steady-state of output per
worker:
The steady-state of output per
worker:
y= 10(k)1/4 E3/4
y= 10(19.11E)1/4 E3/4
y*= 10(19.11)1/4 E1/4 E3/4
y*= 10(19.11)1/4 E
y*= 21 E
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Now we can find the steady-state
growth rate of output per worker:
Growth rate of output (y*) = 0 +
growth rate of (E)
Δy* /y* = 0 + ΔE / E
Δy* /y* = 0 + g
Δy* /y* = 0.02
Growth rate of output (y*) =
0.02 (2 percent)
C. The steady-state growth rate
of saving and investment per
worker.
To find the steady-state growth rate
of saving and investment per
worker, we need to find the steady-
state of saving and investment per
worker:
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The steady-state of saving and
investment per worker:
S* = i
S* = sf(k*)
S* = s(y*)
S* = 0.128(21 E)
S* = 2.688 E
Now we can find the steady-state
growth rate of saving and
investment per worker:
Growth rate of saving (S*) = 0 +
growth rate of (E)
ΔS* /S* = 0 + ΔE / E
ΔS* /S* = 0 + g
ΔS* /S* = 0.02
Growth rate of saving (s*) =
0.02 (2 percent)
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D. The steady-state growth rate
of consumption per worker.
To find the steady-state growth rate
of consumption per worker, we need
to find the steady-state of
consumption per worker:
The steady-state of consumption per
worker:
c*= (1 – s) y*
c*= 0.872 (21 E)
c*= 18.312 E
Now we can find the steady-state
growth rate of consumption per
worker:
Growth rate of consumption (S*) =
0 + growth rate of (E)
Δc* /c* = 0 + ΔE / E
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Δc* /c* = 0 + g
Δc* /c* = 0.02
Growth rate of consumption
(c*) = 0.02 (2 percent)
5. Calculate the steady state
growth rates of: capital, output,
saving and investment and
consumption.
First, we need to find the steady-
state of capital.
The steady-state of capital:
Since, Y = 10 (K)1/4 (EL) 3/4
ΔK = 0
sY – δK = 0
sY = δK
K* = sY/δ
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K* = 0.128 (10(K)1/4 (EL) 3/4) /
0.10
K* = 12.8 (K)1/4 (EL) 3/4
K*/ (K)1/4 = 12.8 (EL) 3/4
K* K-1/4 = 12.8 E3/4 L3/4
K*3/4 = 12.8 E3/4 L3/4
(K*3/4)4/3 = (12.8)4/3 (E3/4)4/3(L3/4) 4/3
K* = 30 EL
Now, the growth rate of capital:
ΔK* /K* = 0 + ΔE / E + ΔL / L
ΔK* /K* = 0 + g + n
ΔK* /K* = 0 + 0.02 + 0.04
ΔK* /K* = 0.06 the growth
rate of capital.
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The steady-state of output:
Y* = 10(30 EL)1/4 (EL)3/4
Y* = 10(30)1/4 E1/4L1/4 E3/4L3/4
Y* = 23.4 EL
Now, the growth rate of output:
ΔY* /Y* = 0 + ΔE* /E* + ΔL* /L*
ΔY* /Y* = 0 + g+ n
ΔY* /Y* = 0.02 + 0.04
ΔY* /Y* = 0.06 growth rate of
output.
The steady-state of saving and
investment:
S=i
S = sY*
S* = s (23.4 EL)
S = 0.128 (23.4 EL)
S = 3 EL
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Now, the growth rate of saving and
investment:
ΔS* /S* = 0 + ΔE* /E* +
ΔL* /L*
ΔS* /S* = 0 + g+ n
ΔS* /S* = 0.02 + 0.04
ΔS* /S* = 0.06 growth rate of
saving and investment.
The steady-state of consumption:
C* = (1 – s)Y*
C* = (1 – 0.128) Y*
C* = (0.872) (23.4 EL)
C* = 20.4 EL
Now, the growth rate of
consumption:
ΔC* /C* = 0 + ΔE* /E* + ΔL* /L*
ΔC* /C* = 0 + g+ n
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ΔC* /C* = 0.02 + 0.04
ΔC* /C* = 0.06 growth rate of
consumption.
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