ECON6020 Assignment 1 Due Date: Jan 30, 2014

Winter 2014

1. (9 marks) Use the fact that the growth rate of a variable equals the time derivative of its log to show: (a) (3 marks) The growth rate of the product of two variables equals the sum of their growth (t)/Z (t) = [X (t)/X (t)] + [Y (t)/Y (t)]. rates. That is, if Z (t) = X (t)Y (t), then Z (b) (3 marks) The growth rate of the ratio of two variables equals the dierence of their (t)/Z (t) = [X (t)/X (t)] [Y (t)/Y (t)]. growth rates. That is, if Z (t) = X (t)/Y (t), then Z (t)/Z (t) = X (t)/X (t). (c) (3 marks) If Z (t) = X (t) , then Z 2. (12 marks) Factor payment in the Solow model. Assume that both labor and capital are paid their marginal products. Let w denote F (K, AL)/L and r denote F (K, AL)/K . (a) (6 marks) Show that if both capital and labor are paid their marginal products, constant returns to scale imply that the total amount paid to the factors of production equals total net output. That is, show that under constant returns, wL + rK = F (K, AL) K . (b) (6 marks) The return to capital (r) is roughly constant over time, as are the shares of output going to capital and to labor. Does a Solow economy on a balanced growth path exhibit these properties? Explain your answer. 3. (15 marks) Suppose that the production function is Cobb-Douglas. (a) (5 marks) Find expressions for k , y , and c as functions of the parameters of the model, s, n, , g , and . (b) (5 marks) What is the golden-rule value of k ? (c) (5 marks) What saving rate is needed to yield the golden-rule capital stock?

4. (12 marks) Consider a Solow economy that is on its balanced growth path. Assume for simplicity that there is no technological progress. Now assume that the rate of population growth falls permanently. What happens to the balanced-growth-path values of capital per worker, output per worker, and consumption per worker? Sketch the paths of these variables as the economy moves to its new balanced growth path. 5. (10 marks) Find the elasticity of output per unit of eective labor on the balanced growth path, y , with respect to the rate of population growth, n. If K (k ) = = 3%, by about how much does a fall in n from 2% to 1% change y ? 6. (16 marks) Assume that the instantaneous utility function u(C ) in equation (2.1) of the textbook is lnC . Consider the problem of a household maximizing (2.1) subject to (2.6). Find an expression for C , consumption per person at each time (that is, C (t)) as a function of initial wealth plus the present value of labor income, the path of r(t), and the parameters of the utility function.(Hint: you need to nd the rst order condition w.r.t C (t), consumption per person. Note that the lifetime budget constraint holds with equality when utility is maximized.) 7. (26 marks) Consider a Ramsey-Cass-Koopmans economy that is on its balanced growth path, and suppose that there is a permanent fall in g . = 0 curve? (a) (3 marks) How, if at all, does this aect the k (b) (3 marks) How, if at all, does this aect the c = 0 curve? (c) (5 marks) What happens to c at the time of the change? (d) (10 marks) Find an expression for the impact of a marginal change in g on the fraction of output that is saved on the balanced growth path. Can one tell whether this expression is positive or negative? (e) (5 marks) For the case where the production function is Cobb-Douglas, f (k ) = k , rewrite your answer to part (d) in terms of , n, g , and .(Hint: Use the fact that f (k ) = + g .)
1 3,

g = 2%, and