5. One view of the consumption function is that workers have high propensities to consume and capitalists
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5. One view of the consumption function is that workers have high propensities to consume and capitalists have low propensities to consume. To explore the implications of this view, suppose that an economy consumes all wage income and saves all capital income. Show that if the factors of production earn their marginal product, this economy reaches the Golden Rule level of capital.
(Hint: Begin with the identity that saving equals investment. Then use the steady-state condition that investment is just enough to keep up with depreciation and population growth and the fact that saving equals capital income in this economy.)
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