Suppose that there are two goods X and Y produced in perfectly competitive industries facing constant returns to scale in production. There are two inputs labour and capital, denoted by L and K respectively. Denote prices of goods X and Y by Pxand Py respectively; price of L by w and of K by r. a) What type of relationship do you expect between relative prices of inputs used to produce these goods and those of the goods? Explain why. b) Explain the meaning of factor intensity. When will you consider good X to be labour intensive relative to good Y? What changes in these intensities would you expect if relative price of labour increases? c) If X is labour intensive and Y is capital intensive in one nation, does it also have to be the case in the other nation? Why or why not?
Suppose that there are two goods X and Y produced in perfectly competitive industries facing constant returns to scale in production. There are two inputs labour and capital, denoted by L and K respectively. Denote prices of goods X and Y by Pxand Py respectively; price of L by w and of K by r. a) What type of relationship do you expect between relative prices of inputs used to produce these goods and those of the goods? Explain why. b) Explain the meaning of factor intensity. When will you consider good X to be labour intensive relative to good Y? What changes in these intensities would you expect if relative price of labour increases? c) If X is labour intensive and Y is capital intensive in one nation, does it also have to be the case in the other nation? Why or why not?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 2
Suppose that there are two goods X and Y produced in perfectly competitive
industries facing constant returns to scale in production. There are two inputs
labour and capital, denoted by L and K respectively. Denote prices of goods X
and Y by Px and Py respectively; price of L by w and of K by r.
a) What type of relationship do you expect between relative prices of
inputs used to produce these goods and those of the goods? Explain
why.
b) Explain the meaning of factor intensity. When will you consider good X
to be labour intensive relative to good Y? What changes in these
intensities would you expect if relative price of labour increases?
c) If X is labour intensive and Y is capital intensive in one nation, does it
also have to be the case in the other nation? Why or why not?
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