Question

In: Economics

The following diagram presents a circular-flow model of a simple economy. The outer set of arrows...

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___________________ purchase_______________________ in factor markets.

Suppose Cho earns $525 per week working as work as a flight attendant for Flyaway Airlines. She uses $10 to order a mojito cocktail at Little Havana. Little Havana pays Bob $300 per week to wait tables. Bob uses $125 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

Bob earns $300 per week working for Little Havana.
Cho earns $525 per week working for Flyaway Airlines.
Bob spends $125 to purchase air travel to Hawaii from Flyaway Airlines.

Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. Check all that apply.

The mojito Cho receives

The $125 Bob spends to purchase air travel to Hawaii from Flyaway Airlines

The $300 per week Bob earns working for Little Havana

Cho's labor

Solutions

Expert Solution

Based on this model, households earn income when firms purchase factors in factor markets.

Bob earns $300 per week working for little Havana : This event occurs in factor market because Little Havana pays Bob to wait tables i.e Bob is a labor factor at Little havana.

Cho earns $525 per week working for Flyaway airlines: This event occurs in factor market because Cho is a flight attendant in Flyaway airlines.

Bob spends $125 to purchase air travel to Hawaii from Flyaway airlines.: This event occurs in product market because Bob is spending to buy services.

The mojito cho receives : This represents the flow of output from firm to household.

The $125 Bob spends to purchase air travel to Hawaii from Flayaway airlines.: This represents the flow of dollars from household to firms.

The $300 per week Bob earns working for Little Havana: This represents the flow of dollars from firms to household.

Cho's labor: This represents the flow of input from household to firm.

Hence, option(B) and (D) are correct which represents the flow from household to firm.


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