2 Endogenous Growth Theory (5 marks) In the AK model with production function Y = AK. Assume g = = 0 and population is fixed. The saving rate is s and the depreciate rate of capital of 8. 1 a. What is the growth rate of capital (K) and output (Y)? b. Under what conditions can the economy experience perpetual (positive) growth? c. What is the key factor that drives the perpetual growth? Explain the intuition. (hint: compare the AK model with the Solow model) In the endogenous growth model with uncompensated knowledge spillover (Romer, 1986), the production is specified as Y = BK L-a where B = AK-a d. What are the private (marginal) return and the social return to capital, respectively (normalize population L to one)? e. Which one is higher, the private or the social return to capital? Explain the intuition.