Question
. Suppose, in the Solow growth model, that learn- ing by doing is captured as a cost of installing new capital. In particular, suppose that
. Suppose, in the Solow growth model, that learn- ing by doing is captured as a cost of installing new capital. In particular, suppose that for each unit of investment, r units of goods are used up as a cost to firms. (a) Determine how r affects the steady state quantity of capita per worker, and per capita income which results in a one-time reduction in consumption. The new public school buildings increase the efficiency with which human cap- ital is accumulated. Determine the effects of this on the paths of aggregate consumption and aggregate output over time. Is it clear that this investment in new schools is a good idea? Explain.
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