The following diagram presents a circular-flow model of a simple economy. The ou
ID: 1139685 • Letter: T
Question
The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs.
Based on this model, households earn income when (households or firms?) purchase (factors or goods and services?) in factor markets.
Suppose Lucia earns $600 per week working as work as a flight attendant for Flyaway Airlines. She uses $10 to get her car washed at Spotless Car Wash. Spotless Car Wash pays Kenji $475 per week to wash cars. Kenji uses $150 to purchase air travel to Hawaii from Flyaway Airlines.
Identify whether each of the following events in this scenario occurs in the factor market or the product market.
Event
Factor Market
Product Market
Which of the elements of this scenario represent a flow from a firm to a household? This could be a flow of dollars, inputs, or outputs. Check all that apply.
a) The $475 per week Kenji earns working for Spotless Car Wash
b) Lucia's labor
c) The $150 Kenji spends to purchase air travel to Hawaii from Flyaway Airlines
d) The car wash Lucia receives
Event
Factor Market
Product Market
Lucia spends $10 to get her car washed. ______ or ______ Kenji earns $475 per week working for Spotless Car Wash. ______ or ______ Lucia earns $600 per week working for Flyaway Airlines. ______ or ______ Markets for Goods and Services Firms Households Markets for Factors of ProductionExplanation / Answer
Lucia spends $10 to get her car washed.- This involves movement of dollars from households to the firm for goods and services and so it occurs in the product market.
Kenji earns $475 per week working for Spotless Car Wash- This involves paying of wages from firms to households and it occurs in the factor market
Lucia earns $600 per week working for Flyaway Airlines.- This involves paying of wages from firms to households and it occurs in the factor market
The $150 Kenji spends to purchase air travel to Hawaii from Flyaway Airlines and The car wash Lucia receives- involves flow of dollars for the former case and flow of output for the latter case from a firm to household.
(The $475 per week Kenji earns working for Spotless Car Wash and Lucia's labor involves flow of dollars for the former case and flow of inputs for the latter case from a household to firm.)
Kenji earns $475 per week working for Spotless Car Wash- This involves paying of wages from firms to households and it occurs in the factor market
Lucia earns $600 per week working for Flyaway Airlines.- This involves paying of wages from firms to households and it occurs in the factor market
The $150 Kenji spends to purchase air travel to Hawaii from Flyaway Airlines and The car wash Lucia receives- involves flow of dollars for the former case and flow of output for the latter case from a firm to household.
(The $475 per week Kenji earns working for Spotless Car Wash and Lucia's labor involves flow of dollars for the former case and flow of inputs for the latter case from a household to firm.)
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