Question

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.
• B. In two-sector model, entrepreneurial ability, and other factors of production are supplied by households.
• C. In factor markets, households receive wages and other payments from firms in exchange for supplying the factors of production.
• D. Firms purchase goods and services from households in product markets.

Answer 1

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.