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7
7. In the circular-flow diagrams, does each of the following transactions take place in a product market or in a factor market? Which direction does the product or factor flow (between firms and households)? Which direction does the payment flow?
a. Sam pays a storekeeper €2 for a liter of milk.
b. Sally earns €4 per hour working at a restaurant.
c. Susan spends €6 to see a film at the cinema.
d. Stuart receives $10,000 in dividends from his shares in Microsoft corporation.
8. One common assumption in economics is that the products of different firms in the same industry are indistinguishable.
a. Is this a reasonable assumption for restaurant meals? Explain your answer.
b. Is this a reasonable assumption for “commodity” products like copper or gold? Explain your answer.
Expert Solution
7.
a)
In the circular flow diagram, the product market is the place where the firm sells it's final produce, goods, or services. The household buys these produce and supply payments for the firm that flows as revenue towards the firms. it is transacted in the goods market and the payment for the milk is revenue for the milk firm.
b)
the labor or factor market is where the household supplies labor and receives wages from the firms that buy labor at these markets. then the transaction where Sally earns wage for working at a restaurant, this is a transaction of the factor market. The wage flows from firm to household and labor flows from household towards firms.
c)
Susan buys cinema as an entertainment service in the goods market. The payment flows as revenue to the cinema hall owner or entertainment industry. The service flows from industry towards the household.
d)
The dividend is the payment for the capital that Stuart has extended to the firm by buying its share. This is a factor market transaction, the capital flows from household to firms and the payment flows from firm to the household.
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8.
a)
The restaurant meals are distinguishable. Each restaurant serves the one single good "meal" or "food" the food variety changes because each restaurant makes a different recipe. These markets are called monopolistic competition. In this market, the goods are non-homogenous or slightly different from each other. Then the assumption is not reasonable for the restaurant industry.
b)
In case of commodity products like copper and gold, they are just metals. These are indistinguishable by their underlying properties. There are variants of these goods but they are same in quality supplied by all firms in the industry. hence, the assumption is perfect for commodity product like gold and copper.
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