Analysis of slow growth model.
Your company is considering expanding overseas. It is particularly interested in developing marketplaces also narrowed its choice down to two countries, A also B. Your company sells consumer products also is therefore chiefly concerned about the level of consumption per worker as a measure of marketplace potential. After some long also painful research, you gathered the following information about every country
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Country A
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Country B
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Saving rate
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0.3
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0.25
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Depreciation rate
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0.15
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0.2
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Population growth rate
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0
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0
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Technology level
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4
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4
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Degree of returns to scale
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0.5
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0.5
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Today's level of capital stock per worker
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15
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20
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The degree of returns to scale corresponds to the exponent α in the production function described below.
Also, you can suppose which every country has the same population also number of workers. Both countries have a production function similar to the one we studied in class.
F(k)=Akα
where A is the technology level. To answer this question, only use the analysis related to the slow growth model also Explain how explain how you obtain your answers.
a) If your company is interested in maximizing sales in the short run, without really caring about the future, in which marketplace (A or
B) should it enter? Which is, in which marketplace is consumption per worker higher today? Give numerical values to support your answer.
b) Now, if your company Is interested in the (very) long run, which marketplace (A or B) should it enter? Which is , in which marketplace is consumption or worker higher in steady state? Give numerical values to support your answer.
c) For every country, Explain how graphically the transition to their respective steady states, making sure to correctly label your graphs( you can use a different graph for every country ) Elucidate in one or two sentences Elucidate why they will no stay at their current levels of capital.
d) Does your answer to part (b) change if the technology level of country A is instead equal to 3? Give numerical values also Explain how the two scenarios on a graph.
e) Going back to the original parameters, Illustrate what would the saving rate of country a need to be in order for the steady state levels of consumption per worker to be equal across countries.