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.

  

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

Suppose Frances earns $700 per week working as a corporate attorney for Rowan and Martin Associates. She uses $9 to order a mojito cocktail at Little Havana. Little Havana pays Dmitri $425 per week to wait tables. Dmitri uses $250 to purchase legal service from Rowan and Martin Associates.

Identify whether each of the following events in this scenario occurs in the factor market or the product market.

Event	Factor Market	Product Market
Dmitri spends $250 to purchase legal service from Rowan and Martin Associates.
Frances earns $700 per week working for Rowan and Martin Associates.
Frances spends $9 to order a mojito cocktail.

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 $425 per week Dmitri earns working for Little Havana

Frances's labor

The $250 Dmitri spends to purchase legal service from Rowan and Martin Associates

The mojito Frances receives

Answer 1

Based on this model, households earn income when firm purchase factors (resources) in factor markets.

Given situation:

• Suppose Frances earns $700 per week working as a corporate attorney for Rowan and Martin Associates.
• She uses $9 to order a mojito cocktail at Little Havana.
• Little Havana pays Dmitri $425 per week to wait tables.
• Dmitri uses $250 to purchase legal service from Rowan and Martin Associates.

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Dmitri spends $250 to purchase legal service from Rowan and Martin Associates. (Product market)

Frances earns $700 per week working for Rowan and Martin Associates. (Factor market)

Frances spends $9 to order a mojito cocktail. (Product market)

Note: In product market people spends money to buy goods or services.

In factor market people works and earns money.

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The $425 per week Dmitri earns working for Little Havana (Flow from a firm to household. )

Frances's labor (Flow from household to firm)

The $250 Dmitri spends to purchase legal service from Rowan and Martin Associates (Flow from household to firm)

The mojito Frances receives (Flow from firm to household)

Answer: Option (A) and (D)