Question 2)

There are two countries: country A and country B. They have the same (constant returns to scale)

production function and the same saving (s) and depreciation (6) rates. Both countries are in a

long-run equilibrium (steady state).

a) What can you tell about levels of output per worker (), capital per worker (K) and consump-

tion per worker() in two countries? Show them on a graph (with capital per worker on the

horizontal axis and output per worker on the vertical axis.)

b) Now assume that, in country A, some of its constant population are working (N), and some

are retired (L-N), while country B has all of its population working (N = L). In country

A, assume each of the retired people is able to consume CR.

sf

(K) ₁

CR

N'

K*

= 8 +(L-N)-

N

where f(-) is the production function and f = (K). Explain why there must be this extra term

on the right-hand side. Why is it 0 for country B?