Exercise 3.9. Consider the basic Solow model with no population growth and no technological progress, and a production function of the form F (K, H), where H denotes the efficiency units of labor (human capital), given by H = P i∈N hi, where N is the set of all individuals in the population and hi is the human capital of individual i. Assume that H is fixed. Suppose there are no human capital externalities and factor markets are competitive. (1) Calculate the steady-state equilibrium of this economy. (2) Prove that if 10% higher h at the individual level is associated with a% higher earnings, then a 10% increase in the country’s stock of human capital H will lead to a% increase in steady-state output. Compare this to the immediate impact of an unanticipated 10% increase in H (i.e., with the stock of capital unchanged).