Let us compare two wine regions in Europe, the Rheingau region and the Bordeaux re

gion. For simplicity we assume that in each region only two types of wines are produced,

whites (w) and reds (r). In Bordeaux, the production possibility frontier is given by the

equation + = 10, while in Rheingau it is given by + 2 = 8. In all what follows we

assume that white wines are the Numeraire good, so = 1.

a) In which type does the Bordeaux region have a comparative advantage? In which

type does the Rheingau region have a comparative advantage? Explain briefly

your answers. (4 points)

Assume now that each region is closed, that is, there is no outside trade possible.

b) In Bordeaux, the market price of reds is = 2. Which type should winemakers

specialize on if they want to enjoy the largest possible budget set? What is then

the largest possible amount of the other type that they could afford? (3 points)

c) In Rheingau, the market price of reds is = 0.5. Which type should winemakers

specialize on if they want to enjoy the largest possible budget set? What is then

the largest possible amount of the other type that they could afford? (3 points)

d) Now assume that both regions open up to the world market. At which world mar

ket price for reds would the Rheingau farmers consider switching their speciali

zation? Briefly explain. (5 points)