Suppose there are twocountries, A andB, and each is a Solow growth model economy. In eachcountry, a fraction a of the population is rich and a fraction 1a is poor. Suppose that rich people save a fraction sr of their income and poor people save a fraction sp of theirincome, no matter what country they live in. In countryA, suppose that rich people as a group receive a fraction xA of totalincome, while in country B rich people as a group receive xB fraction of total income. Assume that xA>xB.

a. In a steadystate, how does country A differ from countryB?

In a steadystate,

A.

the aggregate savings rate is higher in country A.

B.

the aggregate savings rate is the same between country A and country B.

C.

the aggregate savings rate is higher in country B.

D.

the aggregate savings rates in country A and country B cannot be accurately determined without exact values for sp and sr.

b. How does income per person of the rich and poor compare acrosscountries?

Given the scenarios in countries A andB,

A.

per capita income is higher in country B in the steady state. Despite per capita income of the rich being higher in country A compared to countryB, the poor people in country B receive a higher per capita income. The difference in per capita income of the poor between countries B and A is significant enough to counteract the difference in per capita income of the rich and result in per capita income as a whole being higher in country B.

B.

per capita income is higher in country A in the steady state. The per capita income of the rich is higher in country A compared to country B. The difference in per capita income of the poor between the two countries is undetermined. In countryA, a poor person receives a low fraction of a higher level of per capitaincome, whereas in countryB, a poor person receives a higher fraction of a lower level of per capita income.

C.

per capita income is higher in country A in the steady state. The per capita income of the rich is higher in country A compared to country B.However, the per capita income of the poor is higher in country B compared to countryA, due to the poor people in country A receiving lesser fraction of income.

D.

per capita income is the same between country A and country B. The per capita income of the rich is higher in country A compared to country B.However, the per capita income of the poor in country B is higher than the per capita income in country A. The aggregate level of per capita income balances out between the rich and poor and onaverage, the per capita income level is the same.

c. If you were a poorperson, where would you ratherlive, in country A or countryB? What if you arerich?

If the only measure of welfare is per capitaincome, a rich person would choose to live in

country B

country A

because

the savings rates are lower and total income is higher so they can consume more.

the rich receive a larger fraction of total income and the aggregate savings rates are higher.

Suppose income distribution is now included as a determining factor in economic welfare. A poor person would choose to live in

country B

country A

because

the level of income equality is higher.

the aggregate per capita income is higher.