In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows at a 3 percent rate, then in the steady state, output per actual worker grows at a percent rate.
A)0
B)2
C)3
D)5

Question

Quizplus · Accepted Answer

In the Solow model with technological change, the steady state is reached when investment equals depreciation. In the steady state, capital per actual worker and output per actual worker are constant. However, since the efficiency of labor is growing at 3 percent, output per effective worker (which takes into account changes in efficiency of labor) will also grow at a rate of 3 percent. Since population is growing at a 2 percent rate, the growth rate of output per actual worker will be 1 percent less than the growth rate of output per effective worker, which is 3 percent. Therefore, output per actual worker grows at a 3-1=2 percent rate. Hence, the answer is (B) 2.

In a Solow Model with Technological Change, If Population Grows