2. The circular-flow model The following diagram presents a circular-flow model

Question

2. The circular-flow model 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 Markets for Goods and Services Firms Households Markets for Factors of Production Based on this model, households earn income when purchase In resource markets Suppose Megan earns $900 per week working as jewelry appraiser for Classy's Jewelry Store. She uses $10 to order a mojito cocktail at Little Havana Little Havana pays Larry $475 per week to wait tables. Larry uses $250 to purchase necklace from Classy's Jewelry Store. Identify whether each of the following events in this scenario occurs in the resource market or the product market. Product Market Resource Market Event Megan spends $10 to order a mojito cocktail Larry spends $250 to purchase necklace from Classy's Jewelry Store Larry earns $475 per week working for Little Havana 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 The $475 per week Larry earns working for Little Havana Megan's labor The $250 Larry spends to purchase necklace from Classy's Jewelry Store The mojito Megan receives

Explanation / Answer

Correct answer:

Firms

Factors of production

Explanation:

When a firm buys the factor of production such as labor in the market, then it pays salary and wages to the household as a cost of labor. As a result, the households earn income.

Correct Answer:

Megan spending $10              : Product market

Larry spending $250               : product market

Larry earning $475 a week     : Resource market

Correct Answer:

A.

Larry earns $475 a week for his work at Little Havana. It is the flow of dollars from the firm to the household.

D.

Megan receives Mojito, a product that is manufactured as output and flows from firm to the household.

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