1. (8 points) Consider the economy of Avataria, which can be described by the So

Question

1. (8 points) Consider the economy of Avataria, which can be described by the Solow model. Avatara has the depreciation rates of 6% and the production function 1434 (a) Show that the production function in Avataria exhibits the constant return to scale property. (b) Assume that Avatara has the investment rate of 9% but no population growth. Calculate the steady-state capital-labor ratio, output per worker, and consumption per worker. Also, what is the growth rate of the total output in Avataria in the steady state? c) Now assume that Avataria has the positive population growth, which reduced its steady state output per worker by half. Find the exact rate of the population growth. Also, what is the growth rate of the total output in Avataria in the steady state in this case? (d) Draw the Solow model diagram for Avataria with and without the population growth rate

Explanation / Answer

Marginal analysis is an important decision-making tool in the business world. Marginal analysis allows business owners to measure the additional benefits of one production activity versus its costs. This analysis can help an owner understand whether an activity is profitable and thus make a decision based on that information.

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