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Questions › DSE › DSE 2013 › Q56
2 marksEconomics of Growth and Development › Harrod–Domar and Solow growth models › The Solow model and its steady stateModerateabout 2 min

DSE 2013 Question 56: Harrod–Domar and Solow growth models

In an economy, aggregate output is produced from capital KKK and labour LLL via Yt=αKt+βLtY_t=\alpha K_t+\beta L_tYt​=αKt​+βLt​, with α,β>0\alpha,\beta>0α,β>0. Both factors are fully employed; each worker is paid a wage β\betaβ and each unit of capital a rental α\alphaα. A constant proportion sss of output is saved and invested each period, augmenting next period's capital (no depreciation). The labour force grows at a constant rate nnn.

This production function violates:

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Plain-text version

In an economy, aggregate output is produced from capital K and labour L via Yₜ=α Kₜ+β Lₜ, with α,β>0. Both factors are fully employed; each worker is paid a wage β and each unit of capital a rental α. A constant proportion s of output is saved and invested each period, augmenting next period's capital (no depreciation). The labour force grows at a constant rate n. This production function violates: (A) the neoclassical property of constant returns to scale (B) the neoclassical property of diminishing returns to each factor (C) the neoclassical property of factor returns being equal to the respective marginal products (D) the neoclassical property of substitutability between capital and labour

Also written as: In an economy, aggregate output is produced from capital K and labour L via Y_t=alpha K_t+beta L_t, with alpha,beta>0. Both factors are fully employed; each worker is paid a wage beta and each unit of capital a rental alpha. A constant proportion s of output is saved and invested each period, augmenting next period's capital (no depreciation). The labour force grows at a constant rate n. This production function violates:

Harrod–Domar and Solow growth models has come up 113 times in 7 exams since 2006.

What this question tests

This question is on The Solow model and its steady state, part of Harrod–Domar and Solow growth models in Economics of Growth and Development.

Growth with substitutable factors: capital per worker settles where saving covers depreciation and dilution.

TestStop has 38 past-paper questions on this subtopic; the nearest in year are below.

  • IIT JAM 2022 · Q14An economy follows the Solow model with production function y = √k, where y is output per worker and k is…
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