In Wonderland production per worker (y) depends on capital per worker (k) such that y = 10k. Every year 15% of the capital stock depreciates, while workers in Wonderland save 10% of their income. Every year the population grows at a rate of 5%.

1. Explain what is meant by the 'steady state' and find capital per worker and output per worker in the steady state of Wonderland.

2. Illustrate the steady state of Wonderland using a diagram.

3. The country of Neverland is identical to Wonderland in terms of output per worker, the savings rate, the depreciation rate and population growth. They differ in one respect. Wonderland has capital per worker of 10, whereas Neverland has capital per worker of 20. Which country experiences a higher growth rate of output per worker and how will their growth rates evolve over time?

4. How might Wonderland and Neverland achieve economic growth in the long-run ?