Chapter 3 – Physical Capital
1) The Nature of Capital - What are the five characteristics of capital? Be able to explain each.
2) Capital and Production Functions
a) What is constant returns to scale? Demonstrate for a production function with capital
and labor as inputs.
b) What is diminishing marginal product of factors? Demonstrate for a production
function with capital and labor as inputs.
c) Be able to demonstrate that the Cobb-Douglas production function has CRS,
diminishing marginal product, and constant factor shares.
d) [aside] What are some other potential production functions, and what are their
properties?
3) The Solow Growth Model - Preliminaries
a) Be able to rewrite the production function in per person terms.
b) What are some of the key assumptions of the model (savings, depreciation of
capital)?
c) What is the law of motion for capital per person (Δk = …)?
3) The Solow Growth Model – Analysis [this is a big one!]
a) Be able to analytically solve for kss and yss.
b) Be able to graphically demonstrate kss and yss.
c) Be able to demonstrate (analytically and graphically) steady state income differences
between two countries which differ in some underlying aspect (savings rate, depreciate
rate, productivity).
d) Be able to demonstrate (analytically and graphically) steady state income difference
for one country that suddenly changes in some underlying aspect (savings rate,
depreciate rate, productivity).
3) Solow Growth Model Extension – Multiple-Equilibria and Poverty Traps
a) If savings rate is low for a low income range, and high for a high income range, a
country can face two potential steady-state points. Demonstrate graphically.
b) [aside] What are some other possible scenarios where multiple steady-states can
arise?