According to the circular flow diagram, how do households earn income in factor markets?

• A. By investing in financial markets
• B. By receiving subsidies from the government
• C. By purchasing goods and services from firms
• D. By selling factors of production such as labor, land, and capital to firms

Answer: (D)

Verified step by step guidance

1. Understand the circular flow diagram, which illustrates the movement of resources, goods, services, and money between households and firms.
2. Identify the two main markets in the diagram: the product market (where goods and services are bought and sold) and the factor market (where factors of production are bought and sold).
3. Recognize that households own the factors of production, which include labor, land, and capital.
4. In the factor market, households sell these factors of production to firms, who need them to produce goods and services.
5. Households earn income by receiving payments (wages, rent, interest, profits) from firms in exchange for providing these factors of production.