Question 1

A mobility matrix with no mobility would have a diagonal matrix where all
the values along the diagonal are 1 and all the off-diagonal values are 0.
This represents a situation where people do not move between countries
and remain in their country of origin.

A mobility matrix with perfect mobility would have all values equal to 1,
regardless of the position in the matrix. This represents a situation where
people can move freely between countries and there are no barriers to
migration.

A mobility matrix where poor countries grow, on average, faster than rich
countries would have higher values in the off-diagonal positions
representing movement from rich countries to poorer countries. The
values along the diagonal would also be higher for poor countries,
representing the increase in the population of those countries. This matrix
would indicate that people are moving from rich countries to poorer
countries to take advantage of the growth opportunities available in the
latter.

An imaginary mobility matrix that shows no mobility at all would look like
the following:

Country 1 | Country 2 | Country 3 | ...

------------------------------------------------

1.0 | 0.0 | 0.0 | ...

0.0 | 1.0 | 0.0 | ...

0.0 | 0.0 | 1.0 | ...

... | ... | ... | ...

In this matrix, each country is represented by a row and a column. The

diagonal values (top left to bottom right) are equal to 1, which represents
that everyone in a particular country stays in that country and doesn't
move to another country. The off-diagonal values (all other values in the
matrix) are equal to 0, which represents that there is no migration
between countries. This imaginary mobility matrix shows that there is no
mobility or migration between countries.

A mobility matrix with perfect mobility would look like the following:
Country 1 | Country 2 | Country 3 | ...
------------------------------------------------
1.0 | 1.0 | 1.0 | ...
1.0 | 1.0 | 1.0 | ...
1.0 | 1.0 | 1.0 | ...
... | ... | ... | ...
In this matrix, all values are equal to 1, regardless of the position in the
matrix. This represents a situation where people can move freely between
countries and there are no barriers to migration. There are no restrictions
on the movement of people between countries, and everyone can move to
any country they wish. This imaginary mobility matrix shows perfect
mobility between countries.

A mobility matrix where poor countries grow, on average, faster than rich
countries would look like the following:

Country 1 (rich) | Country 2 (poor) | Country 3 (poor) | ...

--------------------------------------------------------------

0.5 | 0.7 | 0.8 | ...

0.3 | 0.5 | 0.6 | ...

... | ... | ... | ...

In this matrix, the rows and columns represent different countries, and the
values in the matrix represent the migration flows between countries. The
off-diagonal values (values other than those on the main diagonal) are
higher for movement from rich countries to poor countries, reflecting the
growth opportunities available in the latter. The diagonal values for poor
countries are also higher, representing the growth of the population in
those countries.

This imaginary mobility matrix shows that people are moving from rich
countries to poorer countries in search of better economic opportunities,
as the latter are growing at a faster rate than the former. The migration
patterns represented in this matrix indicate that people are moving from
rich countries to poorer countries to take advantage of the growth
opportunities available there.

Question 2 A

The steady-state value of the per capita capital stock (k*) and per
capita income (y*) can be found by setting the change in k and y
over time to zero, which gives:

k* = [sA/(n+δ)]^(1/(1-α))

y* = A[k*]^α[(n+δ)k*]^(-α)
(a) An increase in the technological parameter A will increase the
steady-state value of per capita income, y*, but not per capita
capital stock, k*.

(b) An increase in the rate of saving s will increase both per capita
capital stock, k*, and per capita income, y*.

(c) An increase in the parameter α will increase the steady-state

value of per capita income, y*, but decrease per capita capital
stock, k*.

(d) An increase in the depreciation rate δ will decrease both per

capita capital stock, k*, and per capita income, y*.

(e) An increase in the population growth rate n will decrease the

steady-state value of per capita capital stock, k*, and per capita
income, y*.
Question 2 B

Diagram:

If y=Ak, then the production function has constant returns to

scale, and the per capita output growth rate is equal to the per
capita capital growth rate, g(t). The accumulation equation
becomes:

k(t+1) = (1+s)k(t) - δk(t) + y(t) = (1+s-δ)k(t) + Ak(t)

Substituting y=Ak gives:

k(t+1) = (1+s-δ)k(t) + Ak(t)

This is a linear difference equation in k(t), and the solution to this

equation depends on the value of (1+s-δ). If (1+s-δ) is positive,
then k(t) grows without bound; if it is negative, then k(t) shrinks
all the way down to zero.

To prove that g(t) is also the growth rate of per-capita output at

date t, we can use the production function y=Ak and the
definition of g(t):

g(t) = [k(t+1)/k(t)] - 1

y(t)/k(t) = Ak(t)/k(t) = A
y(t+1)/k(t+1) = Ak(t+1)/k(t+1) = A

Therefore:

g(t) = [k(t+1)/k(t)] - 1 = [y(t+1)/Ak(t+1)] - 1 = [(Ak(t)+sAk(t)-

δk(t))/Ak(t+1)] - 1 = [(1+s-δ)k(t)/Ak(t+1)] - 1 = [(1+s-δ)/A]g(t)

So g(t) is the same value at every date, and we have:

g(t) = (1+s-δ)/A

Substituting y=Ak into the production function, we have:

y(t) = Ak(t)

y(t+1) = Ak(t+1)

Taking the ratio and simplifying, we get:

y(t+1)/y(t) = k(t+1)/k(t) = 1 + g(t)

So g(t) is also the growth rate of per-capita output at date t.

In the Harrod-Domar model, the growth rate of output depends on

the savings rate. This is because in the Harrod-Domar model,
investment is necessary to maintain a constant capital-output
ratio, while in the Solow model, the capital-output ratio is
determined by the production function. Therefore, in the Harrod-
Domar model, a higher savings rate leads to a higher investment
rate, which in turn leads to a higher growth rate of output. In the
Solow model, the savings rate only affects the steady-state level
of output, since in the long run, the growth rate of output is
determined by technological progress.
Question 3

1. Complementarity refers to the idea that a person's productivity is

positively linked not only to their own skills but also to the skills of
their fellow workers. In this case, an individual's decision to acquire
education and become high-skilled is complementary to the decision
of other individuals to do the same, as the productivity of each
individual is enhanced by the presence of more high-skilled workers
in the economy.
2. If H- L< C < 2(H- L), there are three possible equilibria. To see why,
consider the payoff to an individual who decides to become high-
skilled. If a fraction θ of the population becomes high-skilled, then
the payoff to an individual who becomes high-skilled is (1+θ)H-C,
 while the payoff to an individual who remains low-skilled is L. If
nobody becomes high-skilled, then the payoff to an individual who
remains low-skilled is L, while the payoff to an individual who
becomes high-skilled is -C.

If we assume that individuals are indifferent between becoming high-

skilled and remaining low-skilled, we can set the payoffs to these two
strategies equal to each other to find the equilibrium fraction of the
population that becomes high-skilled. This gives us the equation (1+θ)H-C
= L, which can be solved for θ to get:

θ = (L+C-H)/(H-L)

If C is between H-L and 2(H-L), then there are three possible values of θ
that satisfy this equation: one where everybody becomes high-skilled, one
where nobody does, and a third where a fraction of the population
becomes high-skilled. The third equilibrium is unstable because if even a
small fraction of the population becomes high-skilled, the benefits of
doing so increase for everyone else, which creates a positive feedback
loop that leads to everyone becoming high-skilled. Similarly, if nobody
becomes high-skilled, the benefits of becoming high-skilled increase for
those who do, which leads to a positive feedback loop that causes
everyone to become low-skilled.

3. If the return to low-skilled occupations is given by I_L=(1+λθ)L,

where λ is some constant, and the return to high-skilled jobs is the
same as before, there is only one possible equilibrium if the value of
λ is sufficiently high. This is because if λ is high enough, the payoff
to becoming high-skilled is always greater than the payoff to
remaining low-skilled, regardless of the fraction of the population
that becomes high-skilled. In this case, all individuals will choose to
become high-skilled, and there is only one equilibrium.
4. Multiple equilibria arise in the first case but not in the second
because the return to low-skilled occupations is the same for all
individuals in the second case, regardless of the fraction of the
population that becomes high-skilled. This means that the payoff to
becoming high-skilled is always the same, regardless of the fraction
of the population that becomes high-skilled, and there is no positive
feedback loop that can cause multiple equilibria to arise. In the first
case, however, the return to low-skilled occupations is fixed, while
the return to high-skilled jobs depends on the fraction of the
population that becomes high-skilled. This creates a positive
feedback loop that can lead to multiple equilibria.