Question
Consider a Solovian economy with the aggregate
production function Yt = K1/2l1/2 . The initial size of the population is 100, and the initial capital stock is given by 9 units. The entire output produced in each period is distributed to the households as factor incomes (since households are the owners of the capital stock and labor at any time t), who consume half of their income and save the rest. All savings are automatically invested, which augments the capital stock available for production over time. Population does not grow, and there is 100% depreciation of the capital stock within one period. The corresponding steady-state value of aggregate output is:Solution
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