LO 1 Suppose, in the Solow growth model, that learning by doing is captured as a cost of installing new capital. In particular, suppose that for each unit of investment, r units of goods are used up as a cost to irms.

(a) Determine how r afects the steady state quantity of capital per worker, and per capita income.

(b) Now suppose that r difers across countries.

How will these countries difer in the long run? Discuss.