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.

1. What type of relationship do you expect between relative prices of inputs used to produce these goods and those of the goods? Explain why.
2. 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?
3. 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?