Consider a Solow economy with the following Cobb-Douglas production function:
Y = K a (AL)1-a
The capital share of output (a) is 25%, population growth (n) is 1.5%, and the depreciation rate (δ) is 4%. The economy is in steady-state with a growth rate of output per worker of 2% and a capital-output ratio (K/Y) of 3.5.
a. Calculate the saving rate in the initial steady state. Explain whether the economy is above or below its Golden Rule steady state equilibrium.
b. Calculate the level of output per worker at the Golden Rule steady state.
c. Calculate and compare the marginal product of capital (MKP=∂Y/∂K) in the initial steady state and at the Golden Rule steady state