Assume that Australia produces two goods: dishwasher that require labour and specific input capital; and wine that requires labour and specific input land.

(a). Assume that the world price of wine increases. What will happen to employment and output in both sectors in the short run? What will be the effect on nominal and real wages and rental rates? Support your arguments with a box diagram. (7 marks)

(b). Now assume that the world price of wine has not changed and instead this industry experienced a technological breakthrough - better irrigation system that dramatically decreased costs of production of wine. Show again what will be the effect on output, employment, wages and rental rates and support your answer with a box diagram. How is your answer different from what you had in question (a)? (7 marks)