Slow growth model, Your company is considering expanding

Slow growth model

Reference no: EM1311610

Your company is considering expanding overseas. It is particulary interested in developing markets, and narrowed its choice down to two countries, A and B. Your company sells consumer products, and is therefore chiefly concerned about the level of consumption per worker as a measure of market potential. After some long and painful research, you gathered the following information about each country

		Country A	Country B
Saving rate		0.3	0.25
Depreciation rate		0.15	0.2
Population growth rate		0	0
Technology level		4	4
Degree of returns to scale		0.5	0.5
Today's level of capital stock per worker	15			20

The degree of returns to scale corresponds to the exponent α in the production function described below.

Also, you can assume that each country has the same population and number of workers. Both countries have a production function similar to the one we studied in class.

F(k)=Ak^α

Where A is the technology level. To answer this question , only use the analysis related to the slow growth model, and show how you obtain your answers.

a) If your company is interested in maximizing sales in the short run, without really caring about the future, in which market (Aor B) shoud it enter? That is , in which market is consumption per worker higher today? Give numerical values to support your answer.

b) Now, if your company Is interested in the (very ) long run, which market( A or B) shoud it enter? That is , in which market is consumption oer worker higher in steady state? Give numerical values to support your answer.

c) For each country, show graphically the transition to their respective steady states, making sure to correctly label your graphs( you can use a different graph for each country ) Explain in one or two sentences why they will no stay at their current levels of capital.

d) Does your answer to part (b) change if the technology level of country A is instead equal to 3? Give numerical values and show the two scenarious on a graph.

e) Going back to the original parameters , what would the saving rate of country A need to be in order for the steady state levels of consumption per worker to be equal across countries?

Reference no: EM1311610

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