Assume the Home country is endowed with labor and capital, both of which are used in the

production of t-shirts and laptops. Production of t-shirts is labor-intensive while the production of

laptops is capital-intensive. Draw the appropriate diagram to show how the relative wage (w/r) and the labor to capital ratio (L/K) is determined within each industry and for the economy as a whole.

Now, assume that Home opens to trade and the world relative price of laptops is lower than the

autarky relative price of laptops. Show how this will affect the relative wage (w/r) and the L/K ratio within each industry and for the economy as a whole. What has happened to the real payments to labor and capital? Explain your answer carefully.