It turns out that they are not gay, but not because it's inconceivable to children. They just aren't gay. (http://muppet.wikia.com/wiki/Are_Ernie_and_Bert_gay%3F)
Or is this not how it works?
Or gender, like nationality and status under human laws, is an element of the material condition of humanity irrelevant to the manner in which humans participate in the image of God; consider, e.g., Gal 3:28: "There is neither Jew nor Greek, there is neither slave nor free person, there is not male and female; for you are all one in Christ Jesus" (text from the NAB, but the sense isn't shifted in any other version that I am aware of.)
> Or is this not how it works?
I think that the orthodox position would be that man was meant to be in God's image & likeness, but the Fall has warped the world and imperfections have crept in. Kinda like if I took a photograph of you, and then some random person came by and drew on a moustache.