Consider an economy with the saving rate is 0.4 (40%), and the depreciation rate is 0.1 (10%). We observe that when output of this economy(Y) is 2, the most efficient input combination is (L, K)=(1,2) and when the output(Y) is 4, the most efficient input combination is (L, K)=(2,4). We assume the fixed-coefficient production function and constant returns to scale.
(1) Draw the isoquants map with Y=2 and Y=4. (Hint: the isoquant for the Harrod-Domar growth model is the L-shape.)
(2) What is the capital-labor ratio and capital-output ratio when Y=2 and when Y=4?
(3) Write the capital accumulation equation for this economy, and represent the change of output as a function of the change of capital stock and capital-output ratio. Combine these results to estimate the growth rate of this economy. What is the estimated growth rate?