The amount of human capital the average person has varies substantially among countries. Suppose you were to compare a country with lots of human capital (country 1) and a country with less (country 2). Assume that this human capital affects only the level of the efficiency of labor. That is, production for both countries is given by: 1/ 3 2 / 3 Y AK (hL) and country 1 has a higher h than country 2. Also assume that the countries are otherwise the same: they have the same savings rate (labeled ), the same depreciation rate (labeled ), the same population growth rate (labeled n), and no technological progress. Both countries are described by the Solow model and are in their steady states.

a) Derive an expression for y steady state . Be sure to show all your work.

b) Suppose h1 / h2 = 4 . That is, country 1 has four times as much human capital as country 2. What is yss1/yss2 / ? Explain your answer. In particular, why does it appear that h does not exhibit diminishing returns, while in the function for Y above it clearly does?