INVESTMENT, BREAK-EVEN INVESTMENT 2.0 1.6 1.2 0.8 Investment 0.4 0.0 10 CAPITAL

Question

INVESTMENT, BREAK-EVEN INVESTMENT 2.0 1.6 1.2 0.8 Investment 0.4 0.0 10 CAPITAL PER EFFECTIVE WORKER Suppose the population becomes more focused on improving the efficiency of labor. This causes the rate of labor-augmenting technological progress to increase. Assuming that population growth and depreciation remain constant, which line now represents new break-even investment? An increase in the rate of labor-augmenting technological progress causes amount of capital per effective worker. in the steady-state

Explanation / Answer

It will increase.

This is because of the direct relationship between labor augmenting technology process and steady state amount of capital per effective worker. From the following equation we can conclude that for given values of s, , n, and g there will be one unique value of k (represented as k*) satisfying the equation.

s f(k*) = ( + n + g)k*

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