Question

The first principle of economics discussed in Chapter 1 of Mankiw's book is that people face trade-offs. Use a production possibilities frontier to illustrate society's trade off between two "goods"-a clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier? Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants.

Answer 1

The considered model shows that the more restrictions are imposed on production, the more convex the curve becomes. The degree of convexity is an indicator of rising opportunity costs: to expand the production of good X, you have to sacrifice more and more volumes of good Y, and vice versa.