The Cuban regime diverts resources to terribly unproductive uses but they have a large population that is relatively well educated and potentially could be quite productive. Suppose the Cubans save 20% of their income and every period 8% of their capital depreciates. Population growth is 1% and their production function follows a Cobb-Douglas form Y= F(K, L) = AK" aL 1-a where A = 1, a = 0.25. What is the steady state capital stock per worker? K*=290 Y*=K^ 25 (production function per worker y*=1.304 steady state output per worker. Now please answer the follow question: 1. Suppose that, because of both politically-motivated resource diversions and the effects of the US embargo, the capital stock in Cuba is not at its long-run steady state: Today it is 20% lower than its steady state. Tomorrow, Raul Castro decides to step down and empower his distant cousin Bruce, who's been living in the US for years, has good buddies among Democrats and Republicans and believes firmly in liberalizing the financial system to allow market-driven investments. All of the distortions evaporate and the Americans lift their embargo in a big Rose Garden celebration with cigars, Budweiser and mojitos. (a) How much additional capital per worker will be added in the first period of transition? How much will depreciate? (b) What will be the capital stock per worker next period? (C) How much will consumption grow in the first period of the transition? 1 (d) In how many periods will they reach the steady state? How far along will they be in 5 periods?