The Chinese University of Hong Kong

ECON2021D Basic Macroeconomics

2nd term, 2020-21

Assignment Five

No need to submit. Every student will be given 2 marks for this assignment. But you had
better try the questions. TA will discuss with you in tutorials.

1. Do the following production functions exhibit constant returns to scale? You should
assume the inputs are doubled and see what will happen. [You can even assign some
specific values to K and L.]
(a) Y = aK + bN
(b) Y = KN
(c) Y= K 3N

2. The production function of an economy is Y  KAN . The growth rate of

workers (N) is gN and the growth rate of technology (A) is gA.
(a) Rewrite the production function as a relationship between output per effective
worker (Y/AN) and capital per effective worker (K/AN).
(b) Saving rate is s. Depreciation rate is δ. What is the steady-state condition? Use
a diagram to illustrate the steady state. Calculate the steady-state K/AN.
(c) If saving rate increases, will the output per effective worker and capital per
effective worker in the new steady state be higher or lower? Use a diagram to
illustrate. [You can use the same diagram in (b).]
(d) What is the steady-state output per worker (Y/N) growth rate? Briefly explain
whether or not saving rate will affect the growth rate of Y/N at all. Use a
diagram to illustrate if it is needed.