Consider an economy whose production function is
Suppose that it has a saving rate of .1, a population growth rate of .02, and an average depreciation rate of .03 and that θ =.5.
a. Reduce the production function to the form y ak . What is a ?
b. What are the growth rates of output and capital in this model?
c. Interpret a . What are we really saying when we assume that the labor-augmenting technology, A , is proportional to the level of capital per worker?
d. What makes this an endogenous growth model?