1.

The Malthusian growth model: In the Malthusian model:

(a) What are the key relationships and assumptions of the model?
How would you use the model to show what determines standards of
living? Explain intuitively.
The key relationships and assumptions of the model are:
(1)The Neoclassical production function: Y = zF(L,N)
(2)The population growth equation: N/N = g(c)
(3)The market clearing condition: c=y
(4)Land is in a fixed supply
Using the constant returns to scale property and the first 2 equations we can
work out that the output per worker (y) depends on the land per worker (l):
y = Y/N = zF(L,N)/N = zF(L/N,1) = zf(l) (5)
and to the market clearing condition to shout consumption as a function of
land:
c = y = zf(l) (5)
Combining equation (2) with (5) to get:
N = Ng(c) = Ng(y) = Nf(zf(l)) = g(zF(L/N),1)N (6)
Equation 6 shows that that N (new population) is a concave function of N
meaning that there is a steady state in N in which the economy converges,
with the steady state being N*, the points at which N=N.
When the population is below the steady state value, there will more land per
worker and marginal product of using the land is high. High productivity
means that consumption per capita increases and makes the population
better off. This feeling of being well off will result in consumers having more
more childrens which decreases the land per person and the marginal
product of land per worker falls; slowing down the pace at which people have
children.
If the population is below the steady state value, there will more less per
worker and marginal product of using the land is too low consumption per
capita is too low and makes the population and there is not enough land to
support families (lack of shelter, food and etc.) and children meaning
population then falls.
(b) Use the following functional forms to compute the steady state
level of population and consumption per capita. Assume z=1. Y =
zF(L,N) = LN1- and g(C/N) = (C/N)
Since C/N = c and C=Y(market clearing):
N/N = g(c) = g(C/N) = (C/N) = (Y/N) = (LN1-/N) = (LN-) = (L/N) =
(L/N)
Steady state occurs when N/N = 1 implying L=N*(steady state population)
since L/N=1. The production function shows that Y* (steady state) = L L1- =
L. Using the market clearing condition we can see that L=C* and since L=N*;
C*=N* and thus at steady state the population is equal to land and the
consumption per capital c= C*/N* = 1
(c) Suppose that there is an epidemic disease which suddenly
reduces the level of the population. Show graphically what effects it
has on the long-run consumption per worker and explain your
results. Can you see the same conclusion in the algebraic solution
you derived in part (b)?
After the population falls, consumption per worker increases since there is
more land available per worker and the workers are able to produce more
output per capita. Due to the increase in consumption per capita people will
feel better off meaning the consumer starts to have children thus expanding
the population and continues to expand until the consumption per worker is
the same as it was before the reduction in level of population (steady state).

After the epidemic, land per worker increases moving l to l 1. Higher land per
worker means that consumption rises to c 1 which increases population since
N/N becomes larger than 1. Once the population increases, land peer worker
moves back slowly to the steady state level l* and consumption per worker to
c* i.e. back to the steady state

2. The golden rule: Country A and country B both have a production

function Y = F(K, N) = K0.5N0.5 (we assume that z = 1)
(a) What is the production function in per worker terms?
Y = Y/N = zF(K.N)/N = zF(K/N, 1) = zF(k,1) = zF(k,1) = zk11- = zk
(b) Assume that there is neither population growth nor technological
progress in both countries and that 5% of capital depreciates every
year. Assume further that country A saves 10% of output each year
and country B saves 20% of output each year. Find the steady state
level of capital per worker for each country. Then, find the steady
state levels of output per worker and consumption per worker