Problem
After discussing your report with senior economist at the Treasury, they were impressed about how the model can generate sustained economic growth. Then you decide to explain them the following:
A. What is the motivation to study the Romer model? i.e., what are the issues the Solow-Swan model had that stimulated economists to look for an alternative? Explain using at most 3 sentences.
B. Why is the Romer model incompatible with perfectly competitive markets? Justify using at most 3 sentences.
C. Why do we not talk about the notion of steady state in the Romer model? Is it possible for the steady state to be observed in the Romer model? Explain using at most 3 sentences.
D. Using the Homer model discussed in lectures, show (using equations and a diagram) the effect of an increase in the proportion of workers in the research sector on the balanced growth path of output per worker. There is no need to derive the equations again; just use the ones obtained in lectures.