Consider the economy of a small country that has capital stock equal to 900 units. It saves 20% of its output with a depreciation rate of 10% and a production function of Y = k1/2. How much investment takes place for this small country? a) 180 units b) 3 units c) 90 units d) 6 units

Option (d) is correct.

Explanation:

Given that,

Capital stock = 900 units

Saves 20% of its output

Depreciation rate = 10%

Production function, Y =

                                     = (900)^{\frac{1}{2}}

                                     = 30 units

Therefore, the savings is as follows,

= 20% of output

= 0.2 × 30 units

= 6 units

Hence, the savings is equal to the investment for this small economy or country.

Investment = 6 units

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