ONLY ANSWER QUESTION B

Solow-Swan Model (6 marks).

(a) You will demonstrate the importance of diminishing returns to capital in the Solow-Swan model.Draw a Solow-Swan diagram in which there are constant returns to capital.This would happen iftheproductionfunctionwere Yt = AKt, whereA=1. Furthermore, assume that the sum of population growth and the depreciation rate is greater than the saving rate. Does the economy converge to a steady state in this case?

To answer this question, you should draw a Solow-Swan diagram in terms of output per person, as we did in class.Use this diagram to explain why the economy converges to a steady state or not.

(b)Assume, instead, that the sum of population growth and the depreciation rate is equal tothe saving rate.Are there steady states?If yes,what are the steady states capital per person?(Note:A Diagram is not needed for this part.)