Assume Australia, a large country, exports wine and imports cars. Recently climate change has resulted

in very wet weather, reducing wine production in Australia, and increasing the world price of wine

relative to cars.

a. Explain how this can reduce the welfare of Australia, using the production possibility

frontier and indifference curve graph to support your answer.

b. While the normal conclusion is that Australia loses out from the severe weather, that is not

always the case. In fact, Australia can instead experience a gain in welfare from this event. Explain how,

using the production possibility frontier and indifference curve graph to support your answer.