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(1) (2 (3) (4) (6) (5) Capital per Per capita Capital per Per capita Implied TFP to predicted person GDP person GDP match data United

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(1) (2 (3) (4) (6) (5) Capital per Per capita Capital per Per capita Implied TFP to predicted person GDP person GDP match data United States 140.000 60.000 Argentina 55.000 20.000 (Note that all columns (3)-(6) represent the variables as a ratio of the US.) Adding Human Capital to the production function model: Now assume the production function has the following form of: Y = AKO Ll del where e denotes the average years of education in a country. E) (1 points) Which production function do you think better represents reality, the standard Cobb- Douglas production function or this one that includes the variable e. F) (3 points) Calculate the formula for the wage (w.) and the rental price of capital (r), using this new production function. (Assume competitive markets). G) (2 points) How do the wage (w) changes when e increases? How does the rental price of capital (r ) changes when e increases? Now, assume: 8 - 3 H) (2 points) Apply the growth rate formula to the wage function you got in part (F). If the years of education in a country increase (e) by 1%, by how much would the wages in that country increase? 1) (3 points) Fill in the missing column in the table, that is, using the new production function find the implied TFP Argentino Aus (8) (7) Implied TFP to match data average years of education (e) (using new Production function) United States 10 Argentina 8 J) (2 points) Is the difference in implied TFP D larger in column (6) or (8). Explain why do you think the difference is larger/smaller

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