In the Solow growth model the optimal capital to labour ratio, K/L, is where:
A)s + n = s•(k/y).
B)s + n = s•(y/k).
C)n + s = s•(y/k).
D)s + s = n•(y/k).

Question

In the Solow growth model the optimal capital to labour ratio, K/L, is where:
A)s + n = s•(k/y). 
B)s + n = s•(y/k). 
C)n + s = s•(y/k). 
D)s + s = n•(y/k).

Quizplus · Accepted Answer

The optimal capital to labour ratio, K/L, is where the marginal product of capital equals the depreciation rate plus the population growth rate. This can be expressed as (delta)K/K = n + g, where (delta)K/K is the rate of depreciation or the fraction of capital that gets used up each period, n is the population growth rate, and g is the technological progress rate. In the Solow growth model, this can be simplified to s•(y/k) = n + g, where s is the savings rate. Therefore, the optimal capital to labour ratio, K/L, occurs where s•(y/k) = n + g, or s•(y/k) - n = g.

In the Solow Growth Model the Optimal Capital to Labour