Q.1

a. Explain the concept of diminishing returns to physical capital. What does it predict about economic growth of different countries over time? Give two real world examples of countries that are in line with this prediction, and one that contradicts this prediction.

b. How is the concept of diminishing returns to physical capital similar to, and how is it different from, the concept of decreasing returns to scale? Which one of these features is more likely to be observed in real-world economies, and why?

Q.2 Consider the simple version of the Solow model we discussed, and focus specifically on the long run (steady state).

a. What variables within this model can increase the growth rate of output per capita? Explain the intuition behind each.

b. What variables within this model can increase the level of output per capita? Explain the intuition behind each.

c. Which real-world factors that may be important for people's prosperity are not included in our simple version of the Solow model? Briefly discuss them.