If two economies are identical (including having the same saving rates, population growth rates, and efficiency of labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock:
A) will be at a lower level than in the steady state of the high capital economy.
B) will be at a higher level than in the steady state of the high capital economy.
C) will be at the same level as in the steady state of the high capital economy.
D) will be proportional to the ratio of the capital stocks in the two economies.

Question

Quizplus · Accepted Answer

In the Solow growth model, if two economies are identical in all aspects except for their initial capital stocks, they will converge to the same steady-state level of income per worker. This is because the economy with the smaller capital stock will initially grow faster due to diminishing returns to capital, until both economies reach the same steady-state.

If Two Economies Are Identical (Including Having the Same Saving