Short Answer Questions

Two countries both have the following production function:

Y = F (K, LE) = K0.25 (LE)0.75,

where Y is output, K is capital stock, L is total employment and E is labour augmenting technology.

(a)Does this production function exhibit constant returns to scale in K and L? Explain.

(b)Express the above production function in its intensive form (i.e. output per-effective worker y as a function of capital per effective worker k).

(c)Solve for the steady-state value of y as a function of saving rate s, population growth rate n, technological progress g, and capital depreciation rate d.

(d)A developed country has a savings rate of 25% and a population growth rate of 2% per year. A less developed country has a savings rate of 15% and population growth rate of 5% a year. In both countries g = 0.02 and d = 0.05. Find the steady-state value ofy for each country.

(e)What policies might the less developed country pursue to raise its level of income?