QUESTION 2: EFFICIENT INVESTMENT Norway and Uganda are small open economies and face the real interest rates (r = 0.1) in the international borrowing market. Normay's production function in terms of capital and production per worker is: 4= Ak (2) Uganda's production function in terms of capital and production per worker is: 9 = Auk (3) Where k = K/L,9 = Q/L and An > Au. Suppose that both countries produce a numeraire good with price equal to 1. a) Calculate the marginal product of capital for each country. b) Setup the profit maximization problem of each country using the production functions in equations (2) and (3) and take the first order condition. c) Use the first order condition in b) and the production function to derive a linear equation for q as a function of k. What does this line represent? d) Let 8 = 1/2, An = 2 and Au = 1. Graph (on the same graph) both countries' production functions and the line you derived in c). e) Calculate the profit maximizing level of capital for each country and indicate them on the graph. f) Explain why the countries' profit maximizing levels of capital are not the same and what this says about the "convergence theory": g) What does this imply for the efficiency of investment gains from financial globalization? QUESTION 2: EFFICIENT INVESTMENT Norway and Uganda are small open economies and face the real interest rates (r = 0.1) in the international borrowing market. Normay's production function in terms of capital and production per worker is: 4= Ak (2) Uganda's production function in terms of capital and production per worker is: 9 = Auk (3) Where k = K/L,9 = Q/L and An > Au. Suppose that both countries produce a numeraire good with price equal to 1. a) Calculate the marginal product of capital for each country. b) Setup the profit maximization problem of each country using the production functions in equations (2) and (3) and take the first order condition. c) Use the first order condition in b) and the production function to derive a linear equation for q as a function of k. What does this line represent? d) Let 8 = 1/2, An = 2 and Au = 1. Graph (on the same graph) both countries' production functions and the line you derived in c). e) Calculate the profit maximizing level of capital for each country and indicate them on the graph. f) Explain why the countries' profit maximizing levels of capital are not the same and what this says about the "convergence theory": g) What does this imply for the efficiency of investment gains from financial globalization
