Consider an economy where the production function is given by: Y = 10K/N 2/3, where Nt is the number of workers in period . In this economy, 20% of income is saved, the labor force grows at 2.5% and capital depreciates at 3.5%. We also know that in this economy there is perfect competition, and wages and prices are fully flexible. a) Does this production function exhibit constant returns to scale? b) Compute the steady state values of capital and output per worker. Represent in a graph and describe the stability of the equilibrium. e) Suppose this economy receives a lump-sum financial assistance for investment in capital structures from the World Bank. Discuss the subsequent dynamic adjustment of this economy with the help of a graph.

Consider an economy where the production function is given by: Y = 10K/N 2/3, where Nt is the number of workers in period . In this economy, 20% of income is saved, the labor force grows at 2.5% and capital depreciates at 3.5%. We also know that in this economy there is perfect competition, and wages and prices are fully flexible. a) Does this production function exhibit constant returns to scale? b) Compute the steady state values of capital and output per worker. Represent in a graph and describe the stability of the equilibrium. e) Suppose this economy receives a lump-sum financial assistance for investment in capital structures from the World Bank. Discuss the subsequent dynamic adjustment of this economy with the help of a graph.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter7: Production Economics

Section: Chapter Questions

Problem 7E

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