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Explain the significance of assuming that the production function Y = F(K,L) in the Solow model is neoclassical,
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Macro supervision 5: Sajjad Vakilian Economic Growth 1. Explain the significance of assuming that the production function Y = F(K,L) in the Solow model is neoclassical, i.e. it satisfies (i) positive and diminishing returns to private inputs, (ii) constant returns to scale and (iii) the INADA conditions limK?0 FK = limL?0 FL = ? and limK?? FK = limL?? FL = 0. These assumptions have been the fundamental grounding on which most of the neoclassical results have been based on. Their implications are crucial to both an understanding of the neoclassical models and how the various new versions of growth theory which depart from these basic assumptions differ in the outcomes they predict. The steady state in the Solow model represents the capital to labour ratio and output to labour ratio which is constant and does not change, i.e. when ?k = 0, where k = K/L, and so ?y = 0, y =...
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