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Solow Model Example

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Savings rate = 0.2

Depreciation Rate = 0.1

Find y,k and s.

k` – k = 0    (Steady state)

0.2(k ^ 0.5) – 0.1k      (Amount of saving)

k` – k = 0.2(k^0.5) – 0.1k

0 = 0.2(k^0.5) – 0.1k   (k` and k are supposed to be equal in order to achieve a steady state)

0.2(k^0.25) = 0.1k

k^0.5 = (0.2/0.1) = 2

k = 4

y = k^0.5 = 2

MP = y` = 0.5k ^ (-0.5) (Marginal Product) 

0.1 = 0.5k^-0.5

0.2-0.2= (k^-0.5)^-2

25=k

y=k^0.5

y=5

 

 

 

 

Categories: ECO100

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