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Explain how savings and investment in capital change labor productivity. Why do diminishing returns arise?

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Paramjeet Chawla
Paramjeet ChawlaLv8
28 Sep 2019

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Related questions

Explain how savings and investment in capital change labor productivity. Why do diminishing returns arise?

1. Briefly explain why different countries have different standards of living?

2. Explain in detail how savings affect future productivity and standard of living

3. Give an example that illustrates diminishing marginal returns to capital.

4. Explain how diminishing marginal returns to capital property allows poorer countries eventually to catch with rich countries in their standard of living.

5.Explain why natural resources sometimes benefit the country and sometimes make it more difficult for the country to achieve a high standard of living

6. Explain how technological advancement can benefit and hurt the economy at the same time.

Consider an economy with the following production function:

Y = AK.5L.5
The labor force is constant. The rate of depreciation is รŽยด = .1, the savings rate is s = .3.

a. Has this production function constant returns to scale? Why?

b. Write the production function in per worker variables.

c. Does the per worker production function have diminishing marginal returns to capital? Why?

d. Write the fundamental Solow equation in per worker variables.

e. Depict the steady state of this economy.

f. What are the growth rates of per worker output and capital in steady state?

g. Calculate the steady state level of capital, output, consumption and savings.

h. Redraw the initial equilibrium and show what happens when the savings rate increases. Do the growth

rates change?

i. Redraw the initial equilibrium and show what happens when there is a one time increase in population.

. Do the growth rates change?

j. Redraw the initial equilibrium and show what happens when there is a one time innovation that increases

productivity. Do the growth rates change?

k. Redraw the initial equilibrium and show what happens when there is constant productivity growth. Do

the growth rates change?

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