Question

The Iranian regime diverts resources to terribly unproductive uses but they have a large population that is relatively well educated and potentially could be quite productive.

Suppose the Iranians save 20% of their income and every period 8% of their capital depreciates. Population growth is 1% and their production function follows a Cobb-Douglas form

Y =F(K,L)=ĀK^αL^1−α

where Ā = 1, α = 0.5.

1. What is the steady state capital stock per worker?

2. How quickly does the steady state capital stock per worker grow?

3. What is consumption per worker and how quickly does it grow?

4. Suppose that, because of both politically-motivated resource diversions and the effects of the US embargo, the capital stock in Iran is not at its long-run steady state: Today it is 20% lower than its steady state. How much lower is output than its steady state value?

5. Suppose a cadre of Iranian ex patriots in LA have been acting as interme- diaries to negotiated between the US and the current regime. In a surprise move, a deal is made in which the Iranian regime liberalizes their economy, trade restrictions end and a team of consultants, known as “the bobs,” ar- rive in Tehran to help streamline resource allocation. The economy begins to transition to its long-run steady state.

   (a) If at period 0, we are pre-transition and the capital stock is 20% too low, and in period 1, the transition has begun, what is the capital stock in this first period? How much will depreciate between 0 and 1? How much is added   (b) What is consumption in the period 0 pre-transition and how much is it in period 1?

please also answer 5

Answer 1

Solution(s):