1. Show constant returns to scale: Double both inputs  Double outputs
Cobb – Douglas Production Function: Y = Ka L(1-a) a < 1, say a = kapital share of Y = 1/3
Show constant returns to scale:
Double both inputs  Double outputs
Show decreasing returns to capital:
Double capital but leave labor constant  dY/dK=?
Show decreasing returns to labor:
Double labor but leave capital constant  dY/dN=?
Express y = Y/N as function of k = K/N
For given saving rate, s, and depreciation rate, δ, find steady state k and y.
s=.32 and δ=.08  y=? Now s=.16 and δ=.08  y=?

2. Golden Rule: Maximize steady state consumption per worker, c = C/N
Let Y = .5 K.5 N.5 .
Saving rate = s; depreciation rate = δ
Derive steady state k* = K*/N, y* = Y*/N
For δ = .05, compute y* and c* = (1-s)y* for s = .1,.2, …,.9.
Graph y* and c* as functions of s.