Advanced Macroeconomics, ECON40002 Lawrence Uren

Semester 1, 2014 University of Melbourne

Assignment 1
This assignment is due on 2 April, 2014. You may work in groups of up to three people. Please
make sure you place the names of all group members and of your tutor on the assignment that you
hand in.
Q1. Answer Question 1.3 from David Romers textbook, Advanced Macroeconomics, 4th edition,
page 45.
Q2. Optimal Cake Eating
Consider an innite time cake-eating problem. An innitely-lived individual receives utility from
eating cake. He has a nite amount of cake at time 0, denoted k
0
, and he does not have the ability
to create more cake in the future.
max
{c
t
}

t=1

t=1

t
u(c
t
) (1)
subject to the transition equation:
k
t+1
= k
t
c
t
(2)
and the restriction that c
t
0 and k
t
0 for all t.
a) Write out a Lagrangian associated with this problem.
b) What is the interpretation given to the Lagrange multiplier(s) in this problem?
c) What are the rst order conditions associated with this problem?
d) Assume the individual has log utility. That is, u(c
t
) = log(c
t
). Describe the solution to this
problem in as much detail as possible.
Q3. Population growth and long run output
Consider the standard Solow-Swan model discussed in lectures.
a) Consider a decrease in the population growth rate in the Solow-Swan model. What qualitative
eect does this have upon long run output per eective labour and consumption per eective
labour? Explain your reasoning.
b) Derive an expression that describes the quantitative eect of a long run (steady state) change
in output as a result of a change in the level of population growth.
c) Due to government policy, Chinas population growth went from 2 per cent in 1980 to approx-
imately 0 per cent in 2005. Over the same period, output per capita increased from $1,000
to $5,000 (Geary-Khamis units). What proportion of Chinas increase in output per capita
would you attribute to reductions in population growth rate?
1
Use the Solow-Swan model as a framework to answer this question. If you need to, assume
that the saving rate in China is 40 per cent, that the depreciation rate is 7 per cent, and the
production function can be represented by a Cobb-Douglas production function,
Y = K

(AL)
1
.
where = 0.35.
Note, part c) of this question is open-ended. The tutors will be looking for an approach that
provides a reasonable solution to this question.
2