ECON6002 Tutorial 4 (Romer Model)
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ECON6002
Tutorial 4 (Romer Model)
1. Consider the (Paul) Romer model in Section 3.5 of the (David) Romer textbook. Suppose, however, that households have constant-relative-risk-aversion utility with a coefficient of rel- ative risk aversion of 9 (as in the Ramsey model in Chapter 2). Find the equilibrium level of labour in the R&D sector, LA . Hints: 9 1 will affect the equilibrium for the real interest rate in equation (3.40) and the solution for LA will have a similar form to the log utility case, but will depend on 9 .
2. Suppose that policymakers, realizing that monopoly power creates distortions, put controls on the prices that patent-holders in the Romer model can charge for the inputs embodying their ideas. Specifically, suppose they require patent holders to charge 6w(t)/o, where 6 satisfies
o 5 6 5 1.
(a) What is the equilibrium growth rate of the economy as a function of 6 and the other parameters of the model?
(b) Does a reduction in 6 increase, decrease, or have no effect on the equilibrium growth rate, or is it not possible to tell?
2023-07-10