In a perfectly competitive Solow economy with physical capital accumulation, population growth and a Cobb-Douglas production function, show that the “golden rule” steady-state would be reached if at every period aggregate consumption coincides with the aggregate labour income.


Let production function $$F(K_t,L_t)=K_t^aL_t^{1-a}$$

$$max[c^*=f(k^*)-(δ+n)k^*]$$ with respect to $k^*$

Then $MPK=a(k^*)^{a-1}$

So $k_G= (\frac{a}{(δ+n)})^{1/1-a}$ which is golden rule level of capital stock per capita.

Now calculate consumption at golden rule level

$$c_G=f(k_G)-(δ+n)k_G$$ $$c_G=(k_G)^a-(δ+n)k_G$$



$$c_G=(\frac{a}{(δ+n)})^{a/1-a}[1-a]$$ $$c_G=k_G^a[1-a]$$

Ow consider to calculate wage





Now consider aggregate version,




I am confused at the aggregate transformation.

I add this question with its answer in order to contribute to the website. Thus, I will be glad if you add your opinions about my solution as well.


Your Answer

