1. Consider 2 countries, Avataria and Twilightia, which can be described by the Solow model. Avataria has a capital-labor ratio that is initially twice as big as that of Twilightia, but neither country is yet in a steady state. Both countries have the same production function,
Y(K,L) = 4(K)1/2(L)1/2.
Avataria has a 10% investment rate and 8% depreciation rate, while Twilightia has a 15%
investment rate and 12% depreciation rate.
(a) Calculate the steady-state capital-labor ratio for each country. Does the initial capital-labor ratio affect your results?
(b) Calculate output per worker and consumption per worker for each country. Which country has the highest output per worker? The highest consumption per worker?
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