Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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
firms
v purchase
factors
v in factor markets.
Suppose Teresa earns $875 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 Sam $350 per week to wait tables. Sam uses $200 to purchase legal service from Rowan and Martin Associates.
Transcribed Image Text:Identify whether each of the following events in this scenario occurs in the factor market or the product market.
Event
Factor Market
Product Market
Sam spends $200 to purchase legal service from Rowan and Martin Associates.
Teresa earns $875 per week working for Rowan and Martin Associates.
Teresa 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.
O Teresa's labor
O The $350 per week Sam earns working for Little Havana
O The mojito Teresa receives
O The $200 Sam spends to purchase legal service from Rowan and Martin Associates
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