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Discuss the short-run dynamics

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Adjustment costs for human and physical capital. Consider the model from section in which consumables and physical and human capital are produced by the same technology. Imagine, however, that there are adjustment costs for changes in the two types of capital. The unit adjustment costs, analogous to the formulation discussed in section 3.3, are (bK /2)·(IK /K) for K and (bH /2)·(IH /H) for H. Assume that the depreciation rates for each types of capital are 0.

a. Discuss the parameters bK and bH. Which one would likely be larger?

b. Suppose that bK = bH. Discuss the short-run dynamics if the economy begins with K(0)/H(0)(K/H)∗?

c. Suppose now that bK H. Redo part b, and comment on the main differences in the results.

Reference no: EM131167558

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