Again we are in a Solow economy but now our production function is Y = K^3 where
ID: 1213602 • Letter: A
Question
Again we are in a Solow economy but now our production function is Y = K^3 where the depreciation rate is 40% and investment rate is 10%. I =.1Y D = AK a. Graph this Solow economy, calculate the steady state. b. What happens to capita] and output if we are to the left of steady state? What happens to capital and output if we are to the right of steady state? c. What is (Catching Up Growth)? Which of the production functions (Y = squarerootK or Y = K^3) can explain catching up growth? Why does it explain catching up growth?Explanation / Answer
a) 0.1k3 = 0.4k
k= 2
Steady state capital is 2 units.
b) To the left of steady state, addition to capital is more than depreciation, thus it will be profitable to add more capital until it is equal to the steady state level. Capital deepening occurs to the left of steady state.
To the right of the steady state, depreciation of capital is more than the addition to capital. Thus, it will profitable to reduce capital reacing steady state.
Y= K3 represents catching up growth as output will increase by larger proportion.
c. Catching up growth is is the hypothesis that poorer economies'per capita incomes will tend to grow at faster rates than richer economies.