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1. A country is described by the Solow Model with a production function y = k*/?where y is output per worker and k is capital per worker. Now suppose that the fraction of output that is saved 1s 50%. Assume that the depreciation rate is 5%. A) Calculate the country's steady state level of output per worker (i.e. y*)? Graphically illustrate your answer using general notations. B) Now suppose k is equal to 400. Is the country at its steady-state level of output per worker. above the steady-state or below the steady state? Show how you reached your conclusion. (Hint: find the current output per worker, y given the current value of k and compare this with your answer to part A) b Research on the returns to education in developed and developing countries indicates that the first four years of schooling yield returns of 13.4% per year; 10.1% per year for the 5% to 8% year and 6.8% per year after the 8% year of schooling. The table below lists the highest levels of education among the adult (age 25 and over) population in India. Using the data above and those in the table, A) Complete column 3 of the table. B) Calculate the fraction of wages that represented return to human capital. Highest Level of Education Proportion in Population (%) Number of years of | Wage Relative to Schooling No Schooling Complete Higher 15 3. Suppose that we are comparing two countries, i and j. that are similar in every respect except the education of their population. In Country i, all adults have 10 years of schooling. In Country j, all adults have 4 years of schooling. A) Using the same returns to schooling as reported in pages 164-165 of Weil (which are also the same figures - that we assumed in class). calculate the ratio of output per worker in steady state that the Solow model predicts in the two countries. - B) You are told that the ratio of the actual output per worker of country j to the actual output per worker of ~ country iis 0.3. You suspect that differences in savings rates (s) between the two countries may also explain the difference in the countries' output per worker. What magnitude does the ratio of savings rate in the two countries have to be in order to account for the actual difference in the countries' output per worker? (Hint: think about two countries in the Solow model where the two countries are identical except for differences in s and human capital