What happens with no diminishing returns? Consider a Solow model where the production function no longer exhibits diminishing returns to capital accumulation. More specifically assume that the production function is now

  1. What happens with no diminishing returns? Consider a Solow model where the production function no longer exhibits diminishing returns to capital accumulation. More specifically assume that the production function is now

?(t) =??(t)?(t)^2/3

The rest of the model is unchanged. Answer the following questions (total 11 points). a. Draw the Slow diagram in this case.

b. Suppose the economy begins with a certain level of capital stock (precise level does not matter). Show how the economy evolves in the Solow diagram. Be sure you include an output graph in the diagram.

c. What happens to the growth rate of per capita GDP? Does it cease to exist or not? Explain in words

 

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