What happens with no diminishing returns? Consider a Solow model where the production function no longer exhibits diminishing returns to capital accumulation. This is not particularly realistic, for reasons discussed in Chapter 4. But it is interesting to consider this case nonetheless because of what it tells us about the workings of the Solow model. Assume the production function is now Yt AKt . The rest of the model is unchanged.
(a) Draw the Solow diagram in this case.
(b) Suppose the economy begins with capital K0 , and show how the economy evolves over time in the Solow model.
(c) What happens to the growth rate of per capita GDP over time?