Question

Which of the following is not a characteristic of a 'firm' that is a key group in a two-sector model?

• A. Firms are suppliers of goods and services.
• B. Firms use the funds they receive from selling goods and services to buy or hire the factors of production.
• C. All firms are owned by households.
• D. None of the above.

Answer 1

Answer: (D)

None of the above.

A household consists of all the individuals in a home. Households supply the factors of production, particularly labor which is used by firms to make goods and services. Households use the income they receive from selling the factors of production to purchase goods and services which are supplied by firms. The money earned through this is again used by firms to buy the factors of production for use.

Households own the other factors of production as well- directly or indirectly, by owning the firms that own these resources. All firms are owned by households. Small firms, for example a neighbourhood restaurant, can be owned by one person. Large firms, for example like Reliance, will be owned by millions of households that own shares in them. the firms pay profits to the people who own them. These firms are paying for using the capital and natural resources given to them by the owners. So, we can generalize by saying that in factor markets, households are suppliers and firms are demanders.