In a country, output is produced with labor and physical capital. The production function in per-worker terms is y = k1/2. The depreciation rate is 2%. The investment rate (γ) is determined as follows:
γ = 0.20 if y≤ 10
γ = 0.40 if y >10
Draw a diagram showing the steady state(s) of this model. Calculate the values of any steady state levels of k and y. Also, indicate on the diagram and describe briefly in words how the levels of y and k behave outside the steady state. Comment briefly on the stability of the steady state(s)