B) What are the two equations that describe the economy's dynamics? Briefly explain their meaning. c) How does a change in q affect the consumption decision? d) Draw a CAREFULLY LABELLED phase diagram that shows the balanced growth path equilibrium of this economy and the transitional dynamics given that the initial capital per unit of effective labour is below the balanced growth path. (i.e. k(0)

Consider the Ramsey -Cass- Koopmans model. Assume that output is produced according to: Y(t) = K(t)a [A(t) L(t) ] "a The firm in this economy is in perfect competition so it will set w = mpn and r = mpk. The household's utility from consumption is: U(C(t)) = C(t) -q 1-q A) Households will therefore maximize the following equation