Learning by Doing Model

Question 1

Which are some assumptions for firms in the Learning by doing model?

Answer 1

• All firms have the same production function

- The production function’s constant returns allow endogenous growth in the economy

Question 2

Which is a particular characteristic from the Learning by doing model?

Answer 2

There are no decreasing marginal returns of capital, because we assume that accrued knowledge is a subproduct of the investment in physical capital (learning by doing)

Question 3

Which are the Learning by doing model’s two main assumptions?

Answer 3

1. An increase in capital stock will lead to an increase in knowledge (technology grows parallel to investment)
2. Knowledge spillovers; once it is invented, it is available to everyone

Question 4

How does labor behave in the Learning by doing model?

Answer 4

It is constant

Question 5

The Learning by doing model finds scale effects - what does this mean?

Answer 5

The economy’s growth rate and the income per capita growth rate depend on the economy’s total population, L

Question 6

Which is the Learning by doing model’s market failure?

Answer 6

Firms are not aware about knowledge spillovers

Question 7

Which is the optimal solution for the Learning by doing model?

Answer 7

The social planner solution, because it internalizes the market failure (asymmetrical information) and has a higher growth rate than that for the market and the Robinson Crusoe solutions

Question 8

Which mechanisms could be implemented to reach an optimal solution?

Answer 8

• Subsidies

- Taxes