A small country's aggregate production function per hour of labor given by Y = K^1/2. Its depreciation rate is 1% and its investment rate is 10%. What is its steady-state level of capital?

Question

Quizplus · Accepted Answer

In steady-state, the capital stock remains constant. Thus, the investment rate should be equal to the depreciation rate. 0.01K = 0.1Y Substituting Y from the production function: 0.01K = 0.1(K^1/2) 0.1/0.01 = K1/2 K = (0.1/0.01)^2 K = 100

A Small Country's Aggregate Production Function Per Hour of Labor