Consider a Solow economy with a constant returns to scale production function F(K, AL). Suppose that labor and capital are both paid their marginal products, so the real wage is



and the rate of return on capital is



a) The return to capital is roughly constant over time, as are the shares of output going to capital and labor. Does a Solow economy on a balanced growth path exhibit these properties? What is the growth rate of w on a balanced growth path? What is dr/dt? (We really should not talk about the growth rate of r since r need not be positive.)

b) Suppose the economy begins with k(0) < k*. As k moves toward k*, does w grow at a rate greater than, less than, or equal to its growth rate on the balanced growth path. What about dr/dt?