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 Markets for Factors of Production Based on this model, households earn income when ▼ purchase ▼ in factor markets Suppose Beth earns $525 per week working as an analyst for A-Plus Accountants. She uses $8 to have breakfast at Dinah's Diner. Dinah's Diner pays Andrew $450 per week to work as a short-order cook. 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. Factor Market Product Market Event Beth earns $525 per week working for A-Plus Accountants. Andrew spends $225 to purchase tax services from A-Plus Accountants. Beth spends $8 to have breakfast. 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 breakfast Beth receives The $450 per week Andrew earns working for Dinah's Diner O The $225 Andrew spends to purchase tax services from A-Plus Accountants Beth's labor

Answer 1

Based on the given circular flow model, households earn income when Firms purchases factors of production, i.e. land, labor, capital in factor market.

• Beth earns $525 per week working for A-plus accountants - this scenario occurs in factor market as Beth is a labor who earns income working for a firm (A-plus accountants). So, it's a flow of dollars from firm to households.

Andrew spends $225 to purchase tax services from A-plus accountants - this scenario occurs in goods market as it's a flow of dollars from households (Andrew) to firm(A-plus accountants) via market for goods and services, where Andrew purchases tax services.

Beth spends $8 to have breakfast- Beth is spending this money on a good. So, it occurs in goods market.

• The breakfast Beth receives is a flow of output from firm to household(Beth).

The $450 per week Andrew earns working for Dinah's dinner is a flow of dollars from firm(Dinah's dinner) to household (Andrew).

The $225 Andrew spends to purchase tax services from A-plus accountants is a flow of dollars from households (Andrew) to firm(A-plus accountants).

Beth's labor is a flow of input from household (Beth) to firm.

Answer: option A & B