Q2 - Solow growth - capital accumulation. Assume a country has production function Y = K0.3 L0.7 1. Does production have constant return to scale? explain 2. Derive per capita production function y = f (k). 3. Suppose there are no population and technological growth. Depreciation rate o = 0.05, and saving rate s = 0.2 (a) At first period, each worker has 2 units capital kj = 2. Calculate the investment i1 at first period, capital k2 (second period capital stock), and output y2 (second period output) (b) Find steady state capital per capita k* (c) Find steady state income per capita y*, consumption per capita c*, and investment per capita i* (d) Suppose there is another country B has all identical characteristics except saving rate SB = 0.3. What would you expect the y ? higher or lower (No need to calculate, you can use steady state formula k* to justify) 4. Draw the graph that contains curve shows relation between k and y . curve shows relation between k and i curve shows relation between k and ok . Label the steady state k*, y*, c* and i* 5. Does current saving rate lead the economy to Golden Rule steady state? If not, should government increase or decrease saving rate? Suppose government adjust saving rate at period T, draw the graphs that show transitional dynamics to Golden Rule steady state for ygold, igold and Cgold