The following diagram presents a circular-flow model of a simple economy. The ou
ID: 1166781 • 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 whenfirms purchasegoods and services in factor markets.
Suppose Beth earns $575 per week working as an analyst for A-Plus Accountants. She uses $8 to get her car washed at Spotless Car Wash. Spotless Car Wash pays Andrew $275 per week to wash cars. Andrew uses $225 to purchase tax services from A-Plus Accountants.
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.
The $275 per week Andrew earns working for Spotless Car Wash
The car wash Beth receives
Beth's labor
The $225 Andrew spends to purchase tax services from A-Plus Accountants
Event
Factor Market
Product Market
Andrew spends $225 to purchase tax services from A-Plus Accountants. Andrew earns $275 per week working for Spotless Car Wash. Beth earns $575 per week working for A-Plus Accountants.Explanation / Answer
Event 1 occurs in product market as it's a purchase of services by household(Andrew).
Event 2 occurs in factor market as it's an earning by household in exchange of labor.
Event 3 occurs in factor market as it's an earning by household (Berth) in exchange for labor.
A flow from firm to household can be in terms of wages, rent, profit that occurs via factor market or, a flow of goods and services that occurs via product market. The $275 per week Andrew earns (flow of wages from firm to household) and the car wash Beth receives (flow of services from firm to household) are flow from firm to household, while the other two i.e. Beth's labor and the $225 Andrew spends to purchase tax services are flow from household to firm.
Answer- option A and B
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