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21 July, 15:03

Y = F (K, L) = K1/2L1/2. Suppose that both countries start off with a capital stock per worker of 2. What are the levels of income per worker and consumption per worker? Round your answers to two decimal places.

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  1. 21 July, 15:18
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    Income per worker = 1.41; If rate of savings is 20% or 0.20 - Savings = 0.28

    Explanation:

    Y is output or income per worker, is given as a function of factors - Capital & Labour.

    Y = F (K, L) = K^1/2. L^1/2

    Given : 'Capital per worker' = 2

    So, labour = 1 & capital = 2

    Income [Y] per worker = (2) ^1/2. (1) ^1/2

    I. 4 x 1

    = 1.41

    Savings [S] is a function of Income [Y]

    S = f (Y)

    S = s. f (Y); where s represents ratio / proportion of income saved.

    Example : If 's' savings rate is 20% i. e 0.20

    S = (0.20) (1.41)

    = 0.28
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