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?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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