Based on this model, households earn income whenfirms purchaselabor and capital in markets for factors of production. Suppose Simone earns $525 per week working as a jewelry appraiser for Classy's Jewelry Store. She uses $10 to order a mojito cocktail at Little Havana. Little Havana pays Rajiv $300 per week to wait tables. Rajiv uses $175 to purchase a necklace from Classy's Jewelry Store. Identify whether each of the following events in this scenario occurs in the market for factors of production or the market for goods and services. Event Market for Factors of Production Market for Goods and Services Simone spends $10 to order a mojito cocktail. Simone earns $525 per week working for Classy's Jewelry Store. Rajiv spends $175 to purchase a necklace from Classy's Jewelry Store. Which of the elements of this scenario represent a flow from a household to a firm

a. Event   Market for Factors of Production   Market for Goods and Services

1.           Market for Goods and Services (Simone spends $10 to order a mojito cocktail.)

2.          Market for Factors of Production (Simone earns $525 per week working for Classy's Jewelry Store.)

3.          Market for Goods and Services (Rajiv spends $175 to purchase a necklace from Classy's Jewelry Store.)

b. Flows from a household to a firm:

Simone spends $10 to order a mojito cocktail.

Rajiv spends $175 to purchase a necklace from Classy's Jewelry Store.

Explanation:

In the product market (the market for goods and services), Simone and Rajiv, representing households spend their earned income in exchange for goods and services produced by firms.  In the market for factors of production (factor market), Simone and Rajiv offer their labor, capital, and other factors of production to firms in exchange for income.  There is a continual exchange in the two markets between households and firms.

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