Which of the following statement is not true with respect to a two-sector model?
A
In factor markets, households supply labour, entrepreneurial ability, and other factors of production to firms.
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B
In two-sector model, entrepreneurial ability, and other factors of production are supplied by households.
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C
In factor markets, households receive wages and other payments from firms in exchange for supplying the factors of production.
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D
Firms purchase goods and services from households in product markets.
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Solution
The correct option is D Firms purchase goods and services from households in product markets. Households and firms are linked in a circular flow of production, income, and spending.
In factor markets, households supply labor, entrepreneurial ability, and other factors of production to firms.
Firms use the factors of production to make goods and services. They supply these to households in product markets.
In factor markets, households receive wages and other payments from firms in exchange for supplying factors of production.
Households use these wages and other payments to purchase goods and services in product markets.
Firms sell goods and services to households in product markets, and use the funds to purchase the factors of production in factor market.